subject: The Downside Of 401k Plan Automatic Enrollment [print this page] Employers automatically enroll their workers in 401K as part of the employee compensation package. Any increases are integrated into the plan, reducing expenses further. However, many workers can receive matching contributions, although most matches will only be half of what they were before the policy started. In addition, a report by the Center for Retirement Research suggests that health benefits will diminish due to automatic enrollment.
The Urban Institute has examined the potential problems for employees who are automatically enrolled in 401K, especially as auto-enrollment progresses. One concern isn't the employer's capability to make matching contributions, but whether there are any regulations that mandate these matching payments. There are no laws or rules that obligate companies to keep the 401K system funded, which can leave the participating worker without a payout.
The nature of the 401K, a plan without long-term guarantees, government insurance, mandate for matching contributions, and retirement income for the rest of the worker's life make this plan a possible fount of trouble for its participants. The Urban Institute even calls these plans investment programs, and not pension plans, due to the lack of certainty and possibility of loss. As a 2006 survey found that more than half of all surveyed companies participating in 401K didn't know that they had fiduciary responsibilities, which leaves many workers with unwieldy and unreliable plans that don't meet their requirements, charge unreasonable fees, and stumble on due to poor design.
401K automatic enrollment as part of the worker's compensation package does have its perks. However, the benefits the participating employee receives aren't guaranteed by law or regulations - this can result in an inadequate nest egg for the retiree, especially if he or she does not have additional sources of retirement income. Employees should do adequate retirement planning and consider working with a trusted financial professional to ensure that their investments will meet their goals.
