More employers make 401(k) enrollment automatic

By Aaron Smith, staff writer


NEW YORK (CNNMoney.com) -- You could be contributing to a retirement plan without even knowing it.

That's because an increasing number of companies are offering "opt-out" 401(k) plans that encourage more workers to save.

The percentage of employers that offer automatic 401(k) enrollment has increased dramatically to 38%, according to financial services company Charles Schwab (SCHW, Fortune 500). That's more than seven times the rate in 2005, when automatic enrollment was at 5%.

Automatic enrollment is a system in which companies direct pay from a worker's paycheck into a 401(k) plan, unless the employee explicitly chooses to opt out. The system requires no initiative on the part of the employee.

Of the employers who automatically enroll their workers in a 401(k), some 37% also require automatic savings increases. This type of 401(k) plan might start at 3% for an employee, but the employer automatically adds another percentage point the following year. This practice has more than doubled from 14% in 2006 -- when Schwab clients first implemented the strategy.

At the same time, there has been a dip in matching contributions: 69% of employers who offer a 401(k) plan also provide a matching contribution. That's down from a peak of 76% in 2006.

The report also found that 74% of employers offer advice on 401(k) plans, up from 42% in 2005. (See correction below.)

Schwab Retirement Plan Services, a San Francisco-based provider of about 1.5 million 401(k) plans, compiled this data during the first half of 2010.

The practice of automatic enrollment is important in today's economy as it encourages employees to save for their retirement. This is a particularly difficult thing to do during a recession when money is tight. In fact, based on Fidelity Investments' report that came out last week -- there has been an increase in the number of people withdrawing from their 401(k) savings accounts despite steep penalties.

The report said that hardship withdrawals, which are accompanied by penalties, rose to the highest level in 10 years during the second quarter of 2010. During the same quarter, the percentage of participants with outstanding loans from their 401(k) accounts rose to a record high of 22%.

Correction: An earlier version of this article incorrectly reported the percentage of employers offering advice.  To top of page

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