'Autopilot' 401(k)s Taking Off

Twenty-five percent of eligible employees do not participate in 401(k) plans. Less than 10 percent of employees max out their 401(k)s. So it's no surprise that the average 55 to 64-year-old has less than $42,000 saved for retirement in a 401(k).

People realize they are not saving enough, according to surveys, but they simply aren't doing anything to improve the situation.

So, says The Saturday Early Show financial adviser Ray Martin, many employers, mutual fund companies and financial consultants are pushing a 401(k) concept that works with human behavior rather than against it.

"The autopilot 401(k) plan concept is to make certain decisions an automatic part of the plan, instead of requiring employees to make decisions and take actions," Ray explained.

There are four main autopilot 401(k) features, though not all plans include all the features.

AUTOMATIC ENROLLMENT

You are automatically enrolled in the company plan unless you opt out. The typical automatic contribution is 2 to 6 percent. This feature has actually been around awhile - about 25 percent of large companies already offer this.

Given the statistics this is, in concept, a great idea. The problem is, it will set a standard level of savings at the match contribution or lower. In other words, people should be saving much more for retirement. It also lulls people into a sense of false security, believing that, "If my employer prescribes this, it must be right for me." This feature needs to come with a warning message, just like airbags. It's here for your safety, but it can still hurt you.

AUTOMATIC CONTRIBUTION ESCALATOR

Just as it sounds, your contributions are increased automatically. This can work in one of two ways. You can agree to have your contribution upped a certain percentage each year (usually 1 percent). Or you can agree to have your contribution hiked whenever you receive a raise.

That makes a lot of sense. Increasing contributions in small increments makes it easier for people to swallow, and once they make the decision, they don't have to revisit the issue each year. But few people actually utilize this feature unless it is fully explained to them directly and then set up for them.

AUTOMATIC INVESTING

Your money is automatically invested in a mix of stocks/bonds/cash, determined by your age. An older employee's mix will be more stable, while a younger employee's will be more aggressive.

This goes hand-in-hand with automatic enrollment - the money has to go somewhere. If your needs are precisely that of the group you're slotted in, that's fine.

However, that's not always going to be the case. A younger person may need a more stable allocation - for instance, if he or she wants to build up their savings so they can borrow against the account to buy a home. The automatic investing strategy is totally determined by your age.

Another concern is that they tend to use life-cycle funds - a collection of funds that generally have mediocre performance and higher fees. These funds are a little more complex to run, hence, the higher fees.

AUTOMATIC INVESTMENT REBALANCING

Your investment allocation periodically will be reset (for example, quarterly), in order to keep the same percentage balance of funds.

The purpose is to adjust for market moves, so that if a fund selected in an individual's account experienced a very high rate of growth, and as a result becomes too large a percentage of the account allocation, automatic rebalancing will reduce the fund back to the selected percentage and shift money to the other selected funds.

Like the contribution escalator, it's a great idea. However, if you don't have a suitable allocation of investments to start with, this feature is not worthwhile.

Just keep in mind the factors mentioned above.

Another concern: The autopilot 401(k) may actually increase complacency among workers, making them feel as though there's no need to take a more active role in planning, saving and investing for their future.

As mentioned earlier, not all companies offer the autopilot 401(k), but the trend is becoming more widespread.

And it's important to note that one automatic feature will become mandatory in March: When employees with 401(k) accounts of $5,000 or less leave a company, the employer must automatically roll the money into an IRA. This is an effort to stop people from cashing out their retirement funds when they leave a job and, in the process, losing the benefit of long-term compounding. This will particularly help younger workers who have smaller balances in their 401(k)s and are less likely to save for retirement in the first place.