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401(k) law may result in lower contributions

Posted by Cheryl Costa  August 29, 2011 09:57 AM

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In 2006, a new law for 401(k)s was passed. This law provided for several things, but one provision was the automatic enrollment of employees in a company's 401(k). (The employee was always free to opt out, but they had to take a specific action to do so.) Currently, more than half of all large employers automatically enroll their employees in the 401(k) plan.

Overall, automatic enrollment is a very good thing because many new hires intend to sign up for their 401(k) but often forget to do it and now the process is more automated. The problem is that many plans specify a very low contribution rate. Most companies set the "mandatory" contribution rate at 3 percent or less even though the contribution rate that most employees select on their own is between 5 and 10 percent. (And all of these numbers are significantly less than the 10 to 15 percent that most people need to be saving in order to have a financially secure retirement.)

So, if your company is one of the many companies that enrolls its employees automatically, be sure that you know how much you are contributing. Individuals under the age of 50 are able to contribute $16,500 to their 401(k)s in 2011 and those who are age 50 and older can contribute up to $22,000.

This blog is not written or edited by Boston.com or the Boston Globe.
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D. Abraham Ringer is a CERTIFIED FINANCIAL PLANNER practitioner and a Financial Adviser with Morgan Stanley Global Wealth Management in Boston. He is registered in MA, NH, NY and several other states to which his articles are directed. For more information please visit www.morganstanleyfa.com/ringer
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