Automatic Enrollment in Defined Contribution Plans

Carl

I am seeing more and more information regarding employers going to automatic enrollment for their new hires in their defined contribution plans, 401(k), etc. Are you doing this? How did it impact your employees? Your participation in the plan? What are the pros and cons of auto enrollment? Are you healthcare or non-healthcare?

jmcaa

I would be interested in knowing this also. It would be a way to boost participation in the plan. For those of you who have automatic enrollment, what percentage are the employees enrolled at? 1%?

Patty Mac

We are a financial institute and we do not offer this option. We have thought about doing it, but have some of the same questions. We have asked our TPA to give us additional info and how many other clients are offering this type service. You may wish to do the same if you have a TPA handling your plan.

atrimble

Actually, I was thrilled when we heard we could do this. Keep in mind that it hasn't affected our participation rate because (as a governmental entity) we have a customized plan that allows us to mandate participation as a condition of employment. So everyone "signs up" if they want to remain employed - actually, they "sign off" on the automatic enrollment form at the new hire orientation. They have to be at least 21 before I can take the contribution, and they have to have worked for us for six months, but once those two criteria have been met, they start participating on either April 1 or October 1, and these regulations now make it so much more practical. Of course, I explain the program in general terms at orientation ("your 6% contribution 'purchases' an additional contribution from the agency of 6.5% of your gross pay"), and tell them, "If you don't hear from me by X date, request a private orientation." It's worked tremendously here.

System

The downside I've heard is, How do you decide how to invest the ee's 401(k) funds? I think you'd have to be very conservative to avoid the ugliness of a loss of capital.

James Sokolowski
HRhero.com

Patty Mac

That is a real good point that I have not thought about - if anyone is out there that does auto enrollment, how are the investments handled?

atrimble

If no investment specification is made, by default all non-directed contributions go into a no-fee, interest-bearing money market account. None of the funds are lost while they remain in the account, though they don't grow much. Then the employee can go in online or via paper enrollment and elect the investment options at their leisure. We permit them to direct investment of both employer and employee contributions. If the employee does not make an investment election, the funds stay in that basic default account. Employees who do decide to do something with their money can move out some of that initial contribution and leave the rest in, deposit some (or all) of their new money in that account, and/or put some money elsewhere. Employees can also elect to transfer previously invested contributions *into* that account if they want to better protect it. This default account is our most conservative investment option.

I would think that the IRS would look for this type of provision in any amendment to a plan document before issuing a determination letter.

atrimble

Here's the majority of the text of our automatic enrollment form:

Best yet, you don’t have to do anything. You’re automatically enrolled. Just sign the form below and return it to (personnel).

Our agency’s retirement plan offers:
Before-tax contributions – Because contributions are made before taxes, you reduce your current taxable income.
Tax-free growth – You don’t pay any taxes on your contributions, or the interest the retirement funds may earn until you make a withdrawal from the plan.
Additional contributions – As a bonus, the agency also contributes the equivalent amount of what you put into the plan, plus an additional half percent. It’s essentially free money.
Flexibility – It’s a good idea to periodically re-evaluate your investment direction. You can change the amount you’re contributing to the plan or change your investment direction as your financial situation and goals change.
------------
I understand the agency has an automatic deferral provision in the Retirement Plan. Beginning the April or October following my completion of six months of service, the agency will automatically defer 6% of my pay and invest it for me in the (provider's name) Money Market Separate Account. I will be provided the opportunity at that time to complete enrollment forms that allow me to direct the investment of the retirement monies myself.