The Case for 401(k) Auto-Enrollment
A big concern for 401(k) plan sponsors, and employers looking to implement a 401(k) plan, is that employees will not participate in the plan. Oftentimes it can be scary for people to first make the decision to defer a percentage of their paychecks to a defined contribution plan. The way plan sponsors have combatted the problem is by removing the conscious choice to opt-in and replaced it with the choice of opting-out—and it has worked.
Employers want to help their employees save for retirement, and they also want to make sure that they pass discrimination testing so their plan remains qualified. Charles Schwab found that 401(k) plans with the auto-enroll feature had a 15% higher participation rate in 2009 than those that did not. They also found that it kept employees saving through economically turbulent times as shown by the 13% increase in participation from 2005 to 2009, in contrast to a 1% decline in participation in plans without auto-enroll.
So how have employees generally responded? They have been very satisfied with their employer’s decision. In 2010, Prudential did a study and found that 70% of employees indicated they would be have been pleased if their employers had automatically enrolled them in the 401(k) plan. So where employers were once concerned with employees reacting negatively to automatic enrollment, it has been shown that this fear is unfounded.
Of course, there are a few things employers need to know to make sure they are compliant. The most important aspect is that the employer must give at least 30 days notice to employees that they will automatically be enrolled in the company’s 401(k) plan. Employees are also able to revoke the enrollment within 90 days and reclaim their money with no tax liability. When seeking to implement automatic features, an employer should consult a professional to ensure they stay compliant in all aspects of the plan. The U.S. Department of Labor (DOL) also offers multiple resources that can help the plan sponsor with government regulations.
In the end, automatic enrollment has increased employee participation and employees have been very pleased with employers offering this feature. Employers want their employees to save for retirement, and this is one way they can help truly provide a benefit to them. Of course, as with any fiduciary decision, there are some regulations plan sponsors need to be aware of, and the DOL has provided some resources online.
We look forward to seeing more employers offer this decision and will always be happy to help implement this feature. Have questions about your 401(k) plan, or want to start one for your company? We can help with that too. Just call us at 206-386-5455 or send us an email. We are happy to help.
To your wealth,
Joe Maas, CFA, AVA, CFP®, ChFC, CLU®, MSFS, CCIM
President of Synergetic Finance