So you’ve spent all this time putting together a 401(k) plan for your employees, who’s participating? It’s fairly common for employees to be excited about a 401(k) but hesitate to actually contribute to the plan. They know it’s the right thing to do but put it off for another time. Automatic enrollment provides a small push to help employees get started. The ultimate decision is still theirs to make.
But wait a minute -- How much time and energy do you want to devote to your retirement plan? Automatic enrollment is hardly a set-it and forget-it type feature. Adding automatic enrollment means adding numerous new requirements with their own deadlines the plan will need to monitor. It also increases the chances for errors. In general, implementing automatic enrollment will generally mean more time and energy spent to maintain the plan.
Once you decide you want to try automatic enrollment, there are lots of ways to accomplish it. First, let’s discuss some advantages and disadvantages to help determine if it’s the right choice for you.
Advantages of Automatic Enrollment
Increased participation in a retirement plan can have a number of benefits:
Disadvantages of Automatic Enrollment
Summary – Advantages vs. Disadvantages
Comparing some advantages and disadvantages of automatic enrollment is often like looking at two sides of the same coin. Whether you see a feature as an advantage or disadvantage may simply depend on your viewpoint.
Overall, an automatic enrollment feature means the plan/plan sponsor is making some choices for the participant. For some employers/employees this makes sense. For others, it can feel too parental/protective.
The choice to include automatic enrollment can also be purely practical – as a way to help pass nondiscrimination testing. Other options include setting up safe harbor employer contributions. Safe harbor contributions can be set up as a minimum matching contribution or a minimum percentage of compensation. Automatic enrollment can also be combined with a safe harbor employer contribution.
Types of Automatic Enrollment
Automatic enrollment can be set up in numerous ways. The plan document will need to set the basic ground rules. There are 3 basic ground rules that typically need to be specified:
Policies and procedures can fill in the gaps and can change with circumstances and time as necessary. Details like deadlines to opt out of automatic enrollment could be specified in the document or left to administrative procedures. It is also possible to set up an arrangement that allows employees to opt out of automatic enrollment for a short period of time (up to 90 days) after it has begun and receive a refund of contributions that were made to the plan on their behalf.
Notice and Other Requirements
No matter what type of automatic enrollment program is offered, employees must have notice of the automatic enrollment program. If automatic enrollment is combined with a safe harbor program, the notice must be provided annually within certain time-frames. Participants must have an effective opportunity to elect to receive an amount in cash or have that amount contributed by the employer to the plan. Failures tend to arise from not timely following a participant’s request to opt out of automatic enrollment – or failing to implement automatic enrollment for a new employee.
Many factors will determine how an automatic enrollment plan is designed. Your plan document may limit the way the automatic enrollment program can be set up. The employee population will help determine how complex the program can or should be. The employer’s desire and ability to manage an automatic enrollment program will also play a large part of the analysis.