EPS 37 - Don’t panic—your 401(k) might just be your best friend: Automatic Enrollment in a 401(k)

In this episode of Pink Money, Jerry Williams tackles a common workplace shock: automatic 401(k) enrollment. When a listener panics after finding their paycheck suddenly smaller, Jerry explains why employers are allowed to do this, how automatic contributions work, and why it’s ultimately designed to benefit you.

From target-date funds to money markets, pre-tax vs. Roth contributions, and employer matches, Jerry breaks down how to make the most of your retirement plan. He also shares practical advice on what to do if you’re strapped for cash, how to adjust contributions without missing out on “free money,” and why starting early is key to building long-term financial security.

A clear, empowering guide for anyone navigating retirement savings—whether you’re just starting out, catching up, or simply confused about where your money’s going.

💬 Have a question or comment? Contact Jerry here

Transcript

UNKNOWN: 0:01

Bye.

SPEAKER_03: 0:53

Hello and welcome to the Pink Money Show. My name is Jerry Williams and in this podcast we talk about all things related to money from a gay perspective. And, you know, one of the things that happened to me recently was I got asked a question, kind of a panic call, if you will, because I had someone who got their paycheck and then all of a sudden they realized that it was short. So it wasn't the amount that they were expecting. And when they looked a little further into it, they realized that their employer has started withholding for a 401k. And which was alarming to them is that they had never signed up for a 401k with their employer. And so they were curious, anxious, mad, everything at the fact that my employer started to take money from me And I don't know where it's at, and I don't know why they did that. And they wanted to know what are the repercussions, what can they do, et cetera. So I explained to them that actually their employer does have the right and the ability to automatically enroll them in a 401k plan. There is a section in the IRS code, number 414W, that allows for automatic contribution arrangements. So as of 2006, when they passed this law, they set up the ability for contribution rates to be automatically withdrawn by employers for their employees. Now that may sound kind of strange, right? Because you're like, what? How in the world are they going to be able to take my money from me without me? So the whole idea behind this concept was, of course, people don't generally save enough for retirement or they start much too late saving for retirement. So it's always better to start earlier because then you have the power of time working on your money. So The earlier you invest, the longer you have to let it sit and do its thing. You know, the more money you're going to have in the long run, plus, you know, the contributions that you continually make on an ongoing basis. That's how, you know, you end up with a nest egg of a million and whatnot, you know, if you consistently do it. And also saying that if you are lucky enough to have some matching contributions from your employer, and if you also should be lucky enough to be able to put in the maximum amount that you can into your 401k. So all that taken into consideration means that the idea was, just like Social Security, they withhold money for you, and then ultimately when you retire and you start withdrawing, You've contributed a certain amount of money, and then you're able to reap the benefits of that, and the government starts giving you that money back. Similarly, with your 401k, your 403b, those kind of defined contribution plans, then it's the same thing where you put money into it, and ultimately when you retire, then there is a nest egg for you to withdraw on and live on. And that can generally just supplement your Social Security so you're not living on just Social Security, which is usually not enough for anybody to really essentially live on. And that's kind of another story in and of itself. But back to the whole idea here. So I explained to them that they automatically had money taken from them and 401K was set up for them and that they needed to get a hold of their employer, their employer, manager, their HR department, or, you know, whomever is their point of contact and get the paperwork, the 401k packet that describes who the company is, you know, who is the custodian of their money and what their investment choices are. Because very, very often when money is withdrawn, it will go into a very conservative type of an account, like maybe a money market. Or it could be something, if you're lucky, like maybe a target date fund, meaning the portfolio is geared towards the year in which you would essentially retire. So let's just say, for example, if you're, I don't know, 33 and you retire at, let's just say age 60, for example, that's 27 years. So 27 years from this year, 2025, and we're looking at a 2050, 2052. Well, the target date fund of 2050 would probably the one you would go into because it's structured in a way that it's more heavily laden in stocks and usually more aggressive, um, so that it's, again, heavily weighted in, you know, big companies, small companies, medium size, and in a quote-unquote aggressive portfolio that is designed to, again, slowly adjust over time automatically and will become more conservative, more conservative as time marches on. So it's just a simple set it and forget it in an easy way, you know, to... put your money into something that, again, is going to work for you. So the whole idea usually is the younger you are, the more risk you can take, and the older you get, then the more conservative you want to be because you don't have the luxury of time any longer when you're, you know, fast approaching, you know, your retirement years. If you're in your 50s, you don't want to be going into a very aggressive fund because if the market happens to, you know, crash, you're It can take upwards of maybe 10 years to recover. So if you're already in your 50s and you've got that 10-year time frame and you've just got 10 more years you've got to try to make up, it just doesn't work out for you. So you might have to delay your retirement, et cetera. So you don't want to do that. The whole idea, unless, again, you are just willing to roll the dice and you're like, hey, let it go, but that's up to you. But again, the more... a common strategy is and what most advisors would probably tell you is invest aggressively early on in life, as long as you can, again, take it, you know, you don't worry about it, you're not going to look at your portfolio every day or, you know, and freak out if the market drops 2050%. You know, you're just going to let it stay in there and continually buying regardless of what the market is doing. And then ultimately, As time marches on and you rebalance your portfolio over time, you just get more conservative. So nevertheless, my point really is that you could be invested in something like a 2050 fund, or it could be just sitting in a money market. And a money market really is just a parking lot for your money. And it really just maintains a dollar for dollar ratio. So you put in a dollar, you have a dollar. And it's always designed to just maintain that dollar for dollar ratio so when you do invest you got this money in your account and you just then allocate it out of that account into you know whatever you want to buy mutual funds or you know what have you so in brokerage accounts it works similarly but we're talking about you know a custodial account but again There's generally a parking lot for your money, like I said, usually a money market that you shift out of, or you can take a break from investing, and you don't want to be in the market. Let's say it gets scary for you, and you're just like, no, no, no, no, it's starting to drop. I just want my money all up. Take it all out of the market. Well, you can take it out of the market without withdrawing it, because if you... did withdraw money from your 401k, you're going to be subject to penalties. And especially, like I said, there's not only the early withdrawal penalty, but you would have an additional penalty for being under 59 and a half. So that all aside, you can take a break from investing and move your money from, let's say, your equity funds, and you can move it into the money market. And it can stay in that money market indefinitely, right? You could park it there for... six months. You could park it there for six years. So that's, again, entirely up to you. You could move a portion of your money and leave a portion in all sorts of ways, right? You get the point. So the idea, again, is that if your money, once you find out who the custodian is, you get the packet, you look at your investment choices, and you log into your account, and then you realize it's just sitting in the money market. So If it's just sitting there, again, you really want to invest it. And if you don't know how to invest it or what to invest in, that's really the time to seek some competent advice, right? So you really don't probably want to turn to your fellow employee and ask them because they may not know or they are telling you how to invest based on their own personal strategy. It may or may not be the best for you. So you really want to work with somebody who has your best interests at heart, who takes a look at your whole world and can take all that into consideration, plus getting to know you and your fears, your aspirations, and then can guide you into an investment allocation that really suits you. Because, again, the last thing you want to do is be lying in bed at night and you're just sick worrying about your money because you think that you invested it wrongly. So you need to work with somebody who's going to help you invest it so you can sleep peacefully that night. That's the whole name of the game. And then as time goes on, again, when you need help or you want to talk to somebody, you go back to that point of contact and you say, hey, let's look at my portfolio and let's rebalance if I need to. Or again, the market's dropped and I'm scared to death. What the hell should I do? So 401ks, not a bad thing. Even if you didn't sign up for it, It's just a good idea to let it ride unless you're just dead broke, right? And then really what you want to do is maybe lower the contribution because they could be withdrawing a minimal amount, let's say 3%. They could be withdrawing upwards of maybe 8%, 10%, usually not that much. But the whole idea is you want to get it to a level that you can afford. Now, putting in the bare bones minimum, yes, that is something you can do. Is it the best idea? Probably not. So the reason I say that is because you want to make it almost to the point that it's challenging for you to ignore that money, meaning you want to push yourself to the point that you can do without that money. Because the more that you contribute early on, and again, this is all your money. Nobody else's money. The IRS isn't taking a chunk out of it. In fact, it's going to help you if you put your money in a pre-tax IRA. I mean, excuse me, a 401k. so that it lowers your taxable income. Many times there is also an after-tax, or basically like a Roth 401k, where you're putting money in that's already been taxed, then later on down the road you take out your contributions, tax-free, you only pay tax on the growth. And that really just depends, again, on the type of 401k that you have. And so usually, like in a regular Roth, all the money you put in, all the earnings, as long as it's been there over five years and you're over 59 1⁄2 before you start withdrawing, everything comes out completely tax-free. That's a great thing, right? So again, you want to just put your money in and let it go. And ultimately, you want to fund it to the greatest degree that you can because that's really, again, where you're going to benefit by more money than less money. And most people, again, let's say in your 20s and 30s, and it's just usually people who are slow to start investing for any number of reasons. And you want to rectify that by investing. Now, I have plenty of examples of people who have been advised time and time again to open up an IRA, right? And they know about them. They know how they work for the most part. But they never do it. And then year and year goes by. And next thing you know, again, they have never saved a dime for retirement. So, and likely, similarly, like if you're a spendthrift and you go through your money like water, having this money automatically taken from you again is just going to be more beneficial from you. So, as you're working, contribute. Let the money go, invest it wisely, and put as much money as you can afford to put in. So if you were fortunate enough that you could put the maximum in, you would put in up to$23,500. Now you may have some additional money that's added, like oftentimes your employer will give you a matching contribution. It could be 1%, 3%, 5%. It just really depends. And If, let's say, you're only investing 1% and they match up to 3%, then you're letting free money just slip through your fingers. So ideally, you want to push yourself up to whatever that matching percentage is. Now, sometimes if you're a new employee, they'll say you don't get any matching contributions until you've been here at least a year. And that is what it is. So... you can, again, push yourself to put in whatever that amount is and kind of gear yourself for when that time frame comes. And then if you were up at 3% and the matching is at 3%, then you know that you're going to benefit from that. If you're at 1%, push yourself to 3%, you get the point. So it's just more money for you. But if you're an older person and you want to still contribute to your 401k as well, if you're over 50, you have a$7,500 catch-up provision. So not only can you put in the$2,300, but you can also put in the additional$7,500 catch-up contribution. So... the total amount of money that you would be able to put in, and you cannot exceed this amount in this year, 2025, that'd be$77,500. So that's a lot of money, right? That is a lot of money. But if you're fortunate enough to make a really good salary, that may be a possibility for you. Now, let's say that you're still working for whatever reasons you want to, You know, you enjoy what you're doing, but you're, let's say, age 70, and you can still contribute as long as you're working, and you can still put money into your 401k. Even at the point that you have to start mandatory distributions, those distributions do not apply as long as you're working, so you can still contribute. Again, it's just a magic of time that's working together. It's way on your portfolio. That's the whole point I'm really trying to make. So automatic enrollments, they are a thing. They are allowed. You want to take advantage of putting money into your 401k to the greatest degree you can. Now, if let's say you did match or max out your 401k contributions, and even if you haven't, you can still have an IRA as well. Now, You could open up a traditional Roth, maybe have your pre-tax 401k because you're going to lower your taxable income. Maybe you're not able to put money and take a tax deduction on your IRA because you're already getting a tax deduction on your 401k. You can open up a Roth, okay? You could do that. And then you're contributing to the Roth as well. There's all different kinds of strategies, and it just, again, really depends on what you personally would like to do and how you're going to benefit. That's when you really want to talk to somebody and get their advice and just strategize. And, again, you're not setting this for the rest of your life. Let's say you're in this 2050 fund and you don't like it for whatever reasons. You're not stuck there until 2050 just because you put your money in. So there's usually a plethora of choices, and you can move your money, some of it, all of it, part of it, And you could reallocate it into different funds. Let's say you're in this 2050. And I don't know, you want to invest in a world fund. Yeah, you could take, again, whatever amount you want, and exchange it and go into this, you know, world fund that maybe invest all over the world. Who knows? There's a lot of different things that you might want to take advantage of. Now, should you you know, move your money all the time, like every time you get paid? No, No, no, you don't want to do that. Could you? Yeah. But again, you don't really want to. So making those changes and adjustments should be done on, I would say, no more frequently than every six months, generally like a year. Because again, you really need to see how things are going to work itself out. Oftentimes, you know, people look at their 401k portfolios and, you know, then they look at the performance of the fund they're in and let's say it's down, then they go, no, this fund sucks, you know, and they want to jump out. Yes, again, you can. But what happens if you jump out at the wrong time and the market goes back up? You've missed out on all that gain, right? Because again, it's buy low, sell high. And when you exchange or you move your money, then you've essentially sold, right? So then you have to buy in at a different price. So if you originally bought in five years ago and that price was, you know, much lower five years ago, but the market is down now and you're like, yikes, I need to get out. Then again, when you buy back in, it's probably not going to be that same price that it was five years ago. It could be, could be, right? We've seen unusual circumstances where the market has dropped unbelievably by a huge amount. And it could be well below what you actually originally bought in for. Not always the case, not a usual case, but it can happen. Again, you really just want to set it and forget it. That's really the best advice I would give you. But again, your personal circumstances may dictate how you choose to manipulate your own money. But nevertheless, you want to put your money in and continually contribute money And not stop your contributions unless you have to. So if you're going through some kind of financial circumstance where you need every penny, pause your 401k, right? Put a pause on it, and then you're going to take more home. Hopefully, though, you won't pause that forever. And then once this financial crisis is over, then you can go back in and, you know, reactivate it and start your contributions, etc., etc., There are circumstances when you can withdraw from your 401k, and that really depends. So sometimes they'll let you take out money for, let's say, a first-time home purchase or maybe for unexpected medical expenses, you know, some kind of financial hardship, withdraw. You can check with your 401k provider and look at the provisions, et cetera, and get some guidance in that respect. So that's what I would recommend, and just kind of giving you some additional information so that– If you are freaking out about that, you really now have a better understanding of why and that it's not a bad thing. It's really meant to help you, not hurt you, and that you really want to let it continue to grow over time. Don't turn your back to it. Work with somebody who can help you if you don't feel comfortable making those choices all on your own. So that's all I have to say, and I will talk to you next time.

SPEAKER_02: 22:08

We'll be right back.

UNKNOWN: 22:38

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