WHAT IS an 'Opt-Out Plan'

An opt-out plan is an employer-sponsored retirement savings program that automatically enrolls a company’s employees into either a 401(k) or simple IRA. This differs from a typical plan in that retirement savings continue to accumulate without any action from the participant.

Companies enroll eligible employees into a default allocation at a set contribution rate, usually starting at around 3% of wages. Employees that want another investment, a different contribution, or who do not want to take part must take some sort of action to undo the default settings.


Opt-out plans often differ. Some let employees withdraw automatic contributions, including any earnings, within 90 days of their first automatic contribution. Others automatically increase the contribution rate every year that an employee participates in the plan, up to a maximum default of 10%.

As with other employee-sponsored plans, some offer matching contributions. For example, the employer may match dollar-for-dollar on the automatic contribution, plus 50% of any employee-elected deferrals, up to a certain percentage.

Employers need to abide by certain rules when offering these types of plans.  For example, all employees must be 100% vested after no more than two years of service. Also, default plans must meet a series of rules in order to limit employer liability. In addition, employees need to be offered chances to periodically change their investment choices.

An opt-out plan must spell out all rules to employees, provide notifications and disclosures, and execute the plan uniformly among all who are eligible.  

Pros and Cons of an Opt-Out Plan 

Many workers in the U.S. do not sock away nearly enough for retirement, and some save nothing. Knowing this, some companies enact opt-out plans, in an effort to boost the number of employees who save.

Opt-out plans tend to raise participation rates. However, they generally start at employee contribution levels that are far too low to meaningly help them in retirement. This is hurtful to employees who tend not to take any action on their own, as they continue to underinvest over the long term. Without an education effort to periodically remind employees that, for example, a 3% contribution is just a starting point, many may not save enough over the long run.  

For this reason, some argue that opt-out plans tend to lower employees’ total retirement contributions. To counter this possibility, some employers raise the employee contribution rate by 1% each year, although this still may not be enough to help workers reach their retirement goals.

There are other ways employers can encourage retirement contributions. Raising the company match is one of them. This may work to boost participation as well as the the underlying savings rate of all employees. However, this option costs employers more, in comparison to an opt-out plan.

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