No it is not a new REM song, but it is a new trend for 401k plans.  Employers are now choosing automatic enrollment as a way to increase employee participation in retirement plans.  The typical method of enrollment in the past has relied on employees to actively seek enrollment, once eligible.  Due to regulatory changes, employers can now automatically enroll eligible employees.  Employees who are not interested in participating could choose to opt-out, but must do so by a set deadline.

As a financial planner, I am very excited to see this new trend.  There are so many reasons that employees don’t sign up to participate in the company 401k.  Rarely is it the case that employees don’t want the benefit.  It is more likely the case that employees don’t understand the benefit, think they are too young to save for retirement, or procrastinate.  The fact is that saving for retirement is one of the keys to financial freedom, and the compound effects of saving early is tough to beat.

Automatic enrollment is great, but then what?  How are the passive participants’ funds invested?  The disconnection between 401k participants and investments still exists.  Employers are also trying solve the asset allocation dilemma for 401k participants.  Now, employers are offering a diversified account as a default instead of a money market default.

I have personally seen 401k accounts with staggering amounts of risk due to single fund or single stock risk.  The diversified account default option is particularly helpful to participants who have limited investment experience.  It is often young, new employees who are likely to benefit the most from the new 401k automation.  These employees usually don’t have a financial advisor or any investment experience.  They are also the participants who elect to stay with the money market default when they are the ones who benefit the most from the compounding aspect of a well diversified growth account.

The automation is not just for new employees.  Existing employees who are not actively electing to contribute or manage their 401k accounts are being enrolled and placed into the default diversified account as well.