8/16/2016 - By Zachary Farrington
There’s no question that participation levels for automatically enrolled 401(k) plans far outpace those for non-automatically enrolled plans. In fact, the DOL suggests that adoption of automatic enrollment plans could cut the number of eligible workers who do not participate in their employer's 401(k) plan in half.
Yet, plan sponsors have traditionally been leery about adding this feature. Automatic enrollment places a substantial burden on the payroll department to ensure that elective deferrals are properly initiated on time. In the past, penalties for elective deferral failures were fairly substantial.
Fortunately, Revenue Procedure 2015-28 virtually eliminates the penalties that used to be imposed, opening the door for more plan sponsors to adopt this enrollment feature.
In addition to making it easy for employees to participate, 401(k) plan auto-enrollment also makes it easy for employers to withhold employee contributions and select the investments for those contributions. Additional reasons to consider adding an automatic enrollment feature include:
From a documentation standpoint, adding an automatic enrollment feature is fairly straightforward, requiring a simple amendment to your plan documents. But there are other factors to consider, including these:
Make sure it’s appropriate. Auto enrollment tends to be more impactful and effective for manufacturing companies. In professional firms and white-collar companies, employees typically understand the value of a 401(k) plan and already want to participate. However, auto-enrollment may not be appropriate for companies with a high percentage of transient or seasonal workers.
Establish eligibility. A one-year waiting period is the norm, although some companies make employees eligible for participation in as little as three months.
Communicate and educate. Under an automatic enrollment option, plan sponsors must make every effort to communicate with and educate employees about their options. Payroll stuffers, 90-day notices, posters, employee meetings and the company intranet site should all be utilized.
Automatic enrollment has been shown to be remarkably effective in raising participation rates among eligible workers. The effects appear to be particularly promising for middle- and lower-income households, which often have the greatest need to increase their savings.
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