Carla Fried: Paying for retirement -- what they don't tell you

Carla Fried, on

Published in Business News

There is no shortage of retirement planning tips and strategies that, on face value, make great sense. But all too often the advice is incomplete, the suggested implementation is flawed, or the strategy is based on a risky underlying premise.

Here are five popular retirement strategies where a very good idea doesn’t quite go far enough.

“We auto-enroll you in the workplace retirement plan, so you’re set.”

Over the past 15 years, many workplace retirement plans have automatically enrolled new employees in the 401(k), to get workers over the biggest hurdle: starting to save for retirement. That’s fantastic.

What they don’t tell you: “We auto-enroll you at too low of a rate.” Many plans choose an initial contribution rate for the new employee that is way below the 10% to 15% of salary that experts recommend as being crucial to landing in retirement with enough savings. And many plans lack a feature that automatically raises the too-low savings rate once a year.

“Our workplace retirement plan includes a nice matching contribution.”


After health insurance, a workplace retirement plan is the most valued employee benefit. In the recruiting pitch, HR and hiring managers love to point out the added bonus of a fantastic employer matching contribution.

What they don’t tell you: “Hey, if you rely on us to auto-enroll you, chances are we’ll start you at a contribution rate that ensures you don’t qualify for our maximum match.” Employers are free to draw up their own formula for how they dole out a matching contribution, and there are dozens of different formulas in play. One of the more common formulas is to offer a 50% match for an employee who contributes 6% of their pay into their retirement account. That is, if you send 6% of your pay into your retirement account, your employer will kick in another 3%.

According to T. Rowe Price, less than 40% of plans that auto-enroll workers set an initial deferral rate of at least 6%. That suggests plenty of workers are being set up to leave money on the table.

Moreover, Vanguard’s annual report on workplace retirement plans it administers says that 20% of plans (which cover nearly one-third of all participants in Vanguard-administered plans) have to wait one year before they are eligible for the matching contribution. Spend four years at a job and you only get three years of a match.


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