Most companies implement a 401K Plan in order to assist employees in planning for their future; in doing so, they wish to have high participation. If the current plan an employer has in place is not providing high participation, it may be worth considering amending the plan to adopt auto enrollment. Additionally, they may want to even include an auto escalation feature along with this amendment to increase employees’ contributions on an ongoing basis.
Why Auto Enrollment?
The main reason to have auto enrollment in a plan is to of course, assist employees in planning for their future and increasing plan participation. Additionally, auto enrollment assists employees in selecting investments, as well as if they choose to not select their own investments; then a default will be chosen for them. Most employees who choose not enroll into a plan choose to do so primarily because they are not aware of how these deductions will impact them and they feel that they do not know enough to select these investments.
When a plan makes the decision to implement auto enrollment, they may choose to consult with a professional in order to ensure that it is the best move for the plan, as well as to help make sure the participants have thoroughly reviewed their options. The plan will need to amend the plan document to ensure that it properly states that the plan is set up for auto enrollment. If this is a new plan, they will also want to ensure the plan has a trust as well as a recordkeeping system. Once these plans are in place, it is extremely important to follow the plan document as well as ensure that participants are notified of auto enrollment in advance.
Why Auto Escalation?
Auto escalation in a 401K plan is the option to have a participant’s contribution percentage increase annually by a certain percentage. Implementing this will help participants increase their savings year after year without feeling a large impact on their paycheck. Like auto enrollment, the plan needs to ensure that they have properly updated their plan document to allow for this implementation. It is important also to properly inform participants of this implementation, not to mention to continuously remind participants of these increases as they come around.
Although there is some work on the front end to implementing auto enrollment and auto escalation, if your plan is experiencing low participation, it may be something to consider in order to increase plan participation.
By Brie Keckler, CPA