New 401k rule

[jIM_Ohio]

See article

New 401(k) Law Should Help More Workers Save (The Pro Shop) | SmartMoney.com

summary- every employee puts in 3%, and contribution percentage increases 1% per year until cap of 10%.

employees must opt out, but the 3%/1% appears to be default.

[FrugalFish]

I saw this a few months ago, but wasn't sure when it goes into effect. I think it's a good idea, but agree with the thinking some people have that it should only be raised to the point where an employer is matching. Some of us like to go other directions with our savings from there.

I think this is also going to be rough on employees who don't see a raise every year, especially with inflation looming like it is.

DH just switched jobs and needs to set up his new 401K. What I'm a little uncertain about is when the 1% increase takes effect. If he starts it now, when will they bump it up an additional 1%- a year from now, or Jan 08? Then what if he bumps it up again next Oct when he gets his annual raise? I assume as long as the employee has upped the percentage within the past 365 days, the employer will not increase it further?

[glock35ipsc]

So how will this affect those who already have a 401k? My wife has been maxing out her contributions (up to the match) in her 401K for about 8 years, and the same for her 457 for about 3 years. Will this automatic 1% increase automatically go into effect for her 401k too, or will need to opt in/out of it? Or is it just for new 401k's?

[dmontngrey]

It is my understanding (from talking with our 401k brokers at my office) that this is an option that employers can offer to their employees. If your employer does not have this in their plan, then it wont affect you. There is an opt out option as well. They can't force you to save in their 401k plan. It just puts the burden on the employee to opt out rather than opt in. This is part of a safe harbor plan put in place so that employers pass their discrimination testing and highly compensated employees don't have annual distributions. This plan does have the potential to cost the company more money in company match though. This is why we have not put this in place at my office.

[MonkeyMama]

It's not mandatory. Just something more employers will be offering.

[FrugalFish]

I got to thinking about this more...

"Opting out" wouldn't be opting out of the 401k plan, would it? It would be opting out of the automatic 401K, right? So if someone was at the 6% employer match, then moving funds to other locations, they could opt out of the auto plan and stay at 6% indefinitely?

My DH is with a large employer, so I suspect they will be getting on board with this in January.

[terri77]

You can opt out completely or opt for a different percentage. I think the law is a good idea. Some people would never pay attention to saving for their own retirement if they weren't forced to do so.

[TMoney]

I work at a firm that specializes in administrating DC plans (401k). From my understanding this is called Automatic Enrollment with Escalation. It takes ppts who are not enrolled and Auto Enrolls them with a dafult percentage, unless the ppt opts out by a stated date (and yes, opt out of the auto enroll and escalation, not the 401k plan in general). The Escalation part is that every year the contributions will increase by 1% until the target percentage is reached.

I believe each employer has the choice of adding this to their plans, so not sure about it being mandatory by each provider. As far as ppts who are already enrolled, they will not (i'll say should not) be affected. Hope this helps!