Has your company been having problems passing your 401(k) nondiscrimination tests? One thing you may consider as a fiduciary is discussing automatic enrollment with your Third-Party Administrator. You may be wondering if the extra costs of additional employer matching contributions plus costs of additional implementation and administration expenses are worth the trouble. However, considering the benefits may help you see this option as an extra cost well worth it in the long run. One of the obvious benefits of automatic enrollment is that you may be increasing the pass rate of discrimination (ADP and ACP) testing.
When you do not have adequate performance on your company’s nondiscrimination tests, there is a requirement to undo a portion of your executives’ tax-favored contributions or your company may have to incur the cost of making special contributions to your non-highly compensated employees in order to ensure they are receiving the same benefits through the plan as your highly compensated employees. Automatic enrollment is used to make sure these issues don’t come up within your plan and also helps to keep executives in the company happy with the performance of the plan.