"Automatic" 401K enrollment & deductions

[Gormy Cuss]

47. Automatic enrollment isn't designed to benefit people who aren't saving for retirement.

That's a side effect. While it's nearly always a good idea to take advantage of the tax deferred benefits of a 401K, the reason automatic enrollments became popular is that it allows companies to meet the required ratio of contributions made by "highly compensated employees" (HCEs) to those made by employees earning less.

Highly compensated employees aren't trading off paying for the rent vs. saving for retirement and are more inclined to set aside the full amount allowed by law and lower their current tax obligation. If an insufficient number of low and mid-range earners contribute, the HCEs will not be able to contribute the maximum amounts.

Thus automatic enrollment is one way to increase the contributions for the non-HCEs in hopes of preserving the maximum 401K benefit for management and other highly paid workers.

The "save people from falling into poverty in retirement" is the sales pitch.