9 Responses to Do Automatic Retirement Contributions Help or Hurt?

  1. Joan says:

    “The government wants us to save more because retirees with no money will soon overburden Social Security and Medicare.”—One does not get more from Social Security or Medicare by having no money.

  2. Leigh says:

    To Joan: Your statement is accurate, but I think what Jennifer is saying is that she anticipates a time in the future when those of us who have saved will be “penalized” by the government. If we show a certain amount of wealth, the government will likely opt out of giving us our social security benefits, saying we have a sufficient amount for our basic needs and therefore our money is best given to others who were more frivolous.

  3. Bben says:

    That is exactly what the intent of social security was in the beginning. It was sold to the taxpayers as a way to ‘force’ people to save for retirement. But when the politicians saw all of that money, they just moved the cash into the general fund where they could use it to pay for pork projects instead of investing it as was intended.

    They originally had an opt out for Social Security. That was abolished when they saw how much money they could get from us. Now Social Security ‘contributions’ are just another tax that you must pay.

    If they do make 401k contributions automatic, it won’t be long before they become mandatory and the banks and investment houses will add more fees turning them into an even bigger cash cow for them. Then the forced ‘contributions’ will penalize those who actually want to invest in something besides a low performing required company 401k for their retirement.

    I contributed to company 401k plans for years only to have most of my retirement wiped out by poor planning on the part of the professional fund managers. My calculations show I would have saved just about as much with a mattress fund.

  4. Jack says:

    Read the most recent report on saving from Vanguard – released only a week or so ago. It confirms that automatic provisions, done right, include automatic enrollment, automatic escalation, age-appropriate investment defaults – applied to all participants, not just to new hires. The results:
    (1) Dramatic increases in participation from a national average in the low 70’s to the 90’s, or almost 30% higher.
    (2) Over time, significant increases in the contribution rate.

    Yes, to the extent that the goverment changes social security and Medicare into means-tested programs, people who financially prepared for retirement will be “penalized” – they will have paid their taxes and because they also saved, they will either pay higher Part B and Part D premiums, or higher taxes on social security benefits, both or more, etc. This would be in addition to the existing formula and bend points – that is, the only thing more regressive to income compared to the taxes, are the social security and medicare benefits themselves.

    But, that said, I would also note people are likely to tread carefully here. Because, once you limit the benefits so that they only favor a minority of Americans, those who reach old age after failing to prepare for retirement, you may very well lose the now 75 years of broad based support to tax all working Americans to provide for all who survive into old age.

    For a comparison, think of “ending welfare as we know it” where a Democratic administration put limits on just how far we would tax Americans to provide benefits. Remember, there are some who actually want to expand social security and medicare for those who failed to prepare for retirement – deeming existing benefits inadequate. However, should benefits be raised for those who failed to prepare by making the programs means tested for those who did prepare, I can see the day when a future generation responds with action to limit, not to expand, the “social” in social security.

  5. Larry Bach says:

    Another problem with Auto enrollment is will these participants keep this money in a retirement plan if they change jobs (or loose their job) I believe that most people who won’t take the first steps to think about their own retirement savings are unlikely to do anything but take a lump sum at the end of their employment. So Auto enrollment is a small nudge, to hopefully get them to think about retirement, but with out the backing of a good education campaign, won’t help most people.
    I’m still in favor of Auto enrollment.

  6. REW says:

    I could have sworn that 3% of $2000 every two weeks works out to be slightly over (on average) $120/mo., not $10/mo. as the article states… then again, it is Monday morning, so perhaps I missed something.

  7. Mark says:

    I have about 65 people in my group at work. I have been pushing my employer to automatically enroll new hires into our 401k. We match 50% up to 4% and then “gift” every participant another 2%. You can contribute up to about $15,000 a year. It kills me to see some young people lamenting that they cannot afford to contribute. How can they afford NOT to? These folks make from $30k to $100k. Every one of them could afford at least 6%.
    Do the math. If you contribute just 6% now and increase to 12% by age 65, and your employer gives you another 3% and the market gains (ON AVERAGE; not the last two years) 8%, you would have quite the nest egg after 40 years of working and contributing.
    At just $25k annual income, starting at age 25, if you contribute just $28 a week (6%) and your employer gives you 3%, at annual return of roughly 8%, you’d have close to a quarter million dollars at age 65. At 6% annual return you could then withdraw $1,000 a month without affecting your principal.
    The only secret to success is to start TODAY!

  8. danielle says:

    i think that HR’s should have a good grasp on explaining 401K’s to their employees and make sure they understand the context. if education is lacking that’s where it hurts the individual – then they wouldn’t feel “tricked” as you say, or be complacent if they know what they should be doing with their money. i think that it’s a good idea to auto enroll ESPECIALLY if your employer matches your contribution, given they also provide proper education at the time of enrollment.

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