Drafted to Save

By Daniel Kadlec

There's a war going on over government and industry's efforts to get you to save for retirement. If you haven't been doing your part by stashing money in a 401(k) plan, you just might get drafted. That's right. A growing number of companies have begun enrolling workers in 401(k)s whether they like it or not. This isn't your dad's war. Draftees may--with written notice--opt out. But few do. The result is that plans with an automatic-enrollment feature boast enviable participation rates.

Nationally, 80% of those who qualify take part in a 401(k) plan. But a recent Hewitt Associates study found that the participation rate among new employees shoots to around 97% with automatic enrollment. In view of that, more than 7% of companies now automatically enroll employees in their 401(k) plan--up from 4% three years ago. Expect that percentage to increase, fast.

The IRS first blessed the concept in 1998, saying it was O.K. for new hires and stipulating that anyone enrolled be given ample opportunity to say no thanks. This year the IRS broadened its approval to include existing employees and 403(b) plans for teachers and 457(b) plans for government workers.

Good news? Sure. Such plans are the best deal in town. You pack away pretax dollars that grow tax-deferred, and 90% of companies match some part of their employees' contributions to boot. You should sock away as much as you can this way.

Yet the trend is unsettling. Consider: the law requires that 401(k) savings by highly compensated employees (those earning at least $85,000 a year) be tied to the savings level at the rest of the company. So those highly paid execs deciding to enroll everyone automatically benefit nicely when a company's total savings go up. When the staff contributes more, those who can better afford it get to sock away more too. Not a bad thing. But it may be as much about greed as benevolence.

There are substantial problems with automatic enrollment. In most plans companies choose a low-yielding money-market fund as the default investment and 2% or 3% of pay as the default contribution rate. If you're not paying attention--and that fairly describes anyone who must be forced into a 401(k) plan--you might assume that the company fathers have made wise decisions for you. They haven't.

Most people should be heavily weighted toward stocks and saving the max. Yet Hewitt found that more than half of those automatically enrolled stuck with the woefully conservative default investment option and savings rate. If you've been drafted, chances are you're contributing at a level that doesn't even take full advantage of the company match--a minimum rate for anyone who bothers. Pundits who roundly laud automatic enrollment miss these points.

There are other ways to encourage saving. How about tying a bonus to being in the 401(k) plan? Some companies have tried sending out dummy 401(k) statements to show how much money is at stake. Yet many still don't do the simple things, like allowing new hires into a plan right away. Automatic enrollment is catching on because participation levels have gone flat, and this is how corporate generals choose to reignite growth. Again, it's not a bad thing. But the generals are looking out for their hides. You look out for yours.

See time.com/personal for more on 401(k) plans. E-mail Dan at kadlec@time.com See him on CNNfn, Tues., at 12:20 p.m. E.T.