Understanding automatic enrollment in your 401(k) plan

Valuable Information on 401ks, Pensions, ESOPs, Form 5500 Preparation + More

automatic enrollment, 401(k), employee benefit plans, plan participantsWe’ve all been there: starting a new job. The amount of information and paperwork can be overwhelming. It’s no surprise that reading up on and enrolling in a 401(k) plan isn’t at the top of everyone’s priorities. What may be surprising is that about half of all households age 55 and older have no 401(k) or IRA savings whatsoever, according to the U.S. Government Accountability Office. Automatic enrollment is a feature aimed at improving this statistic by making it easier for employees to start saving for retirement.

What is automatic enrollment?

Automatic enrollment is a 401(k) feature that enrolls newly-eligible employees into the plan if the employees don’t opt in or out themselves. For example, if I forget (or just don’t have the time) to sign up for the 401(k) plan when starting a new job, the auto-enroll feature would kick in once I became eligible and a percentage of my paycheck would be going towards my retirement savings automatically. The automatic deferral percentage is a set rate predetermined by the plan administrator, usually in the ballpark of 3%.

What are the advantages of automatic enrollment?

Multiple studies have shown that plans with automatic enrollment average a significantly higher percentage of employee participation than plans without it. According to the Department of Labor (DOL), it also helps attract and retain talented workers. While the feature only gets employees started, seeing their retirement balance accumulate over time makes it more likely employees will want to learn how to manage retirement savings.

The Pension Protection Act of 2006 included provisions to encourage the implementation of automatic enrollment, which has helped increase the feature’s popularity over the last decade. If a plan’s automatic enrollment meets certain “safe harbor” requirements, it is exempt from yearly nondiscrimination testing requirements.

Are there downsides to having automatic enrollment?

Employers can expect additional plan costs, as the amount of employer-matching contributions is likely to increase. Some employers view this as a small price to pay to increase participation and do what’s best for their employees. Additionally, while automatic enrollment increases participation rates, the deferral percentage that is automatically assigned is typically lower than the rates many employees would themselves select if properly educated on retirement savings. So while automatic enrollment does a great job of getting more employees to start saving, it may give some individuals false security that they’ll have enough savings come retirement. This is one reason why it’s vital to communicate to all employees the importance of doing homework when setting aside retirement money. Overall, automatic enrollment is a great way for an employer to invest in its employees’ futures and get them on the right track towards a secure retirement.

Brad Sinko