Automatic Enrollment - What's it all about?
Automatic enrollment (or default enrollment) is a way to get a higher level of participation in a 401(k) Plan. The way it works is that new employees are informed that a certain percentage of their pay (usually 3%) will automatically be deducted from their paychecks and deposited into an account in their name in the company’s 401(k) Plan, unless they affirmatively elect otherwise.
Automatic enrollment has been authorized under the Internal Revenue Code for a number of years, but legal and fiduciary impediments have discouraged its widespread use. The issues are:
- many state wage and hour laws prohibit any withholding from paychecks (except for that required by law) without specific employee authorization
- the plan fiduciaries are responsible for investing these default accounts, which exposes them to additional liability
The new standard for assessing the success and effectiveness of a 401(k) plan is how many employees are participating in the plan and at what level are they participating. A successful plan is one in which the largest number of people are participating at a high rate. Experts estimate that on average 15% of a participant’s compensation (including both employer and employee contributions) should be going into a plan to enable retirement at a meaningful level. Studies also show that a high percentage of employees who are automatically enrolled do not elect against it.
Automatic enrollment is an effective way to begin achieving the goal of an effective 401(k) Plan by boosting participation rates. Legislation is working its way through Congress to defuse the legal impediments and to make automatic enrollment a reality for all 401(k) Plans. TSC is watching as this issue moves along.
Below are links to various articles on this topic if you are interested in more detailed information and discussion of the issues. Please note that opinions expressed in these articles are those of the authors and are not necessarily those of TSC
DESIGNING 401(K) PLANS THAT ENCOURAGE RETIREMENT SAVINGS: LESSONS FROM BEHAVIORAL FINANCE (AARP Public Policy Institute Issue Brief, March 2006)
Big Changes for Pensions Ahead (Forbes online 2/2/06)
Text of speech by Ann L. Combs, Assistant Secretary of Labor, on Automatic Enrollment (2/1/2006; MJM Financial)
Automatic Enrollment Legislation Chart (American Benefits Council) - 10/11/2005
The ERISA Industry Committee's position on Automatic Enrollment Arrangements (ERIC) - 6/14/2005
Legal Questions Inhibit Automatic Enrollment (Employee Benefit News) - 6/1/2005
Legislation Providing Automatic Enrollment Incentives Would Increase Employee Participation in 401(k) Plans (HR Policy.org) - 5/27/2005
Original Posted October 20, 2005
