5 Ways to Get the Most From Your Employer’s Automated Retirement Plan

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An increasing number of companies are automating their 401(k) plans — automatically enrolling new hires and even automatically choosing investments for employees. If that's true of your employer, don't be lulled into a false sense of confidence. Just because many decisions are being made for you doesn't necessarily mean they're the right decisions. Here's what you need to know.

1. Stay in

The starting point of automated retirement plans is automated enrollment. To not participate, you have to opt out. Don't do that. For the vast majority of employees, participation is a good thing.

2. Invest enough

Most automated plans set employee contributions at very low rates, such as 3 percent of salary, at least initially. Many employees, perhaps assuming that's how much they should be investing, never change their contribution rate.

However, 3 percent of salary is almost certainly not enough — not enough to get the full company match if that's available, and not enough to save adequately for retirement. So, use a free online retirement planning calculator to find out how much you should be saving and set your contribution rate accordingly.

If you can't afford to contribute enough right away, see if your company's plan offers auto-escalation, which will automatically increase your contribution rate over time. If it does, signing up would help you follow through on your good intentions.

3. Choose the right investment(s)

Your plan may automatically invest your contributions in a target-date fund. Such funds have many benefits, but also a few features you should watch out for. The primary benefits are that they come with preset asset allocations based on the year of your intended retirement, and they automatically become more conservatively invested as you near your target retirement date. (See also: What You Need to Know About the Easiest Way to Save for Retirement)

The primary thing to watch out for is that not all target-date funds are created equal. Funds from different fund companies all designed with the same target retirement date in mind can have very different stock/bond allocations.

It would be best to determine your optimal asset allocation using a tool such as Vanguard's free Investor Questionnaire. Then choose the target-date fund that most closely matches that allocation. It might be one with an earlier or later target retirement date than your actual planned retirement date, depending on your optimal asset allocation.

4. Don't pay too much in fees

If a target-date fund is the default investment in your 401(k) plan, and if you like the idea of using a target-date fund, you should still check the fund's expense ratio. The lower, the better. For example, with a fund charging an expense ratio of 0.75 percent, you'll pay $7.50 in fees each year for every $1,000 you have invested. If the expense ratio is 0.25 percent, you'll pay $2.50 per year for every $1,000 invested.

If the default fund's expense ratio is on the high side (to give you a point of reference, Vanguard charges just 0.16 percent for its 2040 target-date fund), see if your plan gives you access to a brokerage window. If so, you should be able to choose a target-date fund from among many fund companies, which should enable you to choose a lower-cost fund. (See also: Watch Out for These 5 Sneaky 401K Fees)

Another option is to see if your plan offers index funds, which typically have very low expense ratios. If so, consider using such funds to build a portfolio that matches your optimal asset allocation. You may be able to do so using as few as three funds.

5. Keep your hands off the money

Some companies with automatic retirement plans are finding that many participants are surprised by how quickly money has built up in their accounts. Surprise is quickly followed by a desire for that money, which is then followed by a loan.

It would be far better to remember what the money is for (retirement!) and keep your hands off. One of the key ingredients for successful investing is time. Pulling money from your account, even temporarily, gives it less time to compound. Plus, if you borrow against your account and then leave your employer — whether by your choice or your employer's — you'll have to repay the entire loan, usually within 60 days.

Automation has been very effective at driving up participation rates in 401(k) plans, which has been beneficial for thousands of people. However, to get the most out of your employer's automated plan, make sure the automated choices are truly the best choices for you. If they're not, don't be afraid to make some manual changes.

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