Beyond Automatic

When economist Richard Thaler won the Nobel Prize in 2017, it triggered memories of his belief that retirement plan sponsors could use investors’ inertia to help them invest better for retirement. Today, companies use tools to do this all the time. Do you know what automatic tools your retirement plan has? You should, because they leverage that inertia on your behalf. Check them out, because you may want to do more.

Automatic Enrollment

To combat workers’ tendency to not get around to participating in a company 401(k) plan, some employers enroll them automatically. Contributions are usually around 3% of income, invested in a target-date mutual fund (usually with a timeframe according to your age) or in a balanced fund.

You can change your defaults, and should if you can contribute more than the initial rate you were given. Additionally, look into investing for more growth, especially if your time horizon is long.

Automatic Escalators

Another tool employers may use to help you build a retirement portfolio is to automatically increase your contribution in line with any raises you receive. Contribution escalators are a good strategy that you may not want to change because a raise is money you never had.

Automatic retirement plan tools can be important for employees who will one day depend on their company’s
401(k) plans. Make sure their defaults are right for you. Depending on the terms of your plan and your budget,
you may be able to contribute thousands of dollars more. And, if you’re at least age 50, you are eligible to defer even more.