Employee Benefits
| Automatic enrollment plans may boost 401K participation |
| Published Monday, August 17, 2009 7:00 am |
New trends in automatic-enrollment plans
The 401(k) plan has become the qualified retirement plan choice for employers throughout the country. The main reasons: employers' costs for a 401(k) are significantly less than the cost of a traditional pension plan, while employees are still able to accumulate a sizeable nest egg without any current tax erosion.
It would seem logical that virtually every employee would jump at the chance to participate in a 401(k). However, enrollment at many companies has remained lower than expected. This may be attributed to a lack of commitment by lower-paid and/or younger workers, who either believe they cannot afford to defer part of their regular salary or lack the foresight to plan ahead for retirement - or both.
Thus, employees may be hurting themselves by passing up the opportunity for tax-advantaged savings. Another consequence is that contributions and benefits for higher-paid employees who do choose to participate, such as the company's officers and shareholder-employees, may be restricted by the tax law's nondiscrimination rules.
Possible solution: You, as the employer, can use automatic enrollment in a 401(k) plan to increase overall participation. Instead of being required to proactively elect to join the plan, an employee is automatically included unless he or she elects not to participate. This is the inverse of the normal situation.
It is human nature for employees sitting on the fence to "do nothing." As a result, it is likely that a greater percentage of lower-paid employees will participate in the plan due to the automatic-enrollment feature. That may also enable higher-earning employees to maximize their contributions. By using a safe harbor plan, you may provide, on behalf of lower-paid employees, minimum contributions that are equal to 3% of compensation. Alternately, a safe harbor employer match of 100% on the first 3% of employee deferral, plus 50% on the next 2% of employee deferral can be made.
After some initial reluctance, automatic-enrollment plans have been embraced by the federal government. In fact, the Pension Protection Act of 2006 liberalizes the rules. For example, the Act preempts state laws that might interfere with an automatic-enrollment plan. In addition, employers are generally relieved of their fiduciary responsibility if an employee's contributions are invested in a qualified default alternative.
Finally, the IRS has provided a new sample notice on its website that employers might use to inform employees.
A third-party administrator or consultant can help meet all the technical requirements for automatic-enrollment 401(k) plans. For example, participation may become automatic after one year of service. Typically, the plan will provide low-risk default investments, although employees are still able to make their own investment choices.
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