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Should You Implement Automatic Enrollment For Your 401(k) Plan?

As a small business owner, you care about the people that work for you. You want them to succeed financially and in life. That’s why you’ve spent the time and money to set up a 401(k) plan for them. 

But do you ever get frustrated with your participation levels? Do you ever ask yourself, “Why won’t they get involved in something that’s good for them?”

This is a common problem for 401(k) sponsors because, like water, most people take the path of least resistance. 

There is a way to use this tendency of inertia that you find so frustrating and turn it around to work for your benefit. How? Through automatic enrollment. If people aren’t willing to make the effort to enroll in your 401(k) plan, they are just as likely to not make the effort to opt out if you enroll them in the plan.

Automatic Enrollment Options

Automatic enrollment is a feature becoming more and more popular for employer-sponsored retirement plans. It enables a plan sponsor to automatically enroll employees in the company plan instead of waiting for the employees to do it themselves. That way, the employees don’t have to do anything of their own initiative. 

To be fair, employees can opt out or change the automatic contribution amount or investments. However, research has shown that employees are much more likely to participate in a 401(k) plan if automatically enrolled. When enrollment is voluntary, only 47% of new employees enroll in their company retirement plan. However, when enrolled automatically, 93% of employees stay enrolled.[1]

With automatic enrollment, the plan sponsor not only enrolls the employees but chooses their default investments as well. An advisor can help you find a balanced, diversified option that is appropriate as a default.  Plan sponsors also choose the amount of pay that is deferred and can set it to increase regularly until it reaches a certain level.

In addition to the basic automatic enrollment plan, there are two specific options available to plan sponsors. The first is the eligible automatic contribution arrangement (EACA). This is different in that you, the plan sponsor, are required to provide notice before uniformly applying the plan’s default deferral percentage to employees. Under an EACA, you can also allow employees to withdraw any deferred amounts from the plan for up to 90 days after the first contributions are made.

The second unique kind of automatic enrollment plan is a qualified automatic contribution arrangement (QACA). These plans are more complex. They are considered “safe harbor” plans, so they are exempt from nondiscrimination testing requirements.

However, with a safe harbor plan the employer is required to make contributions on behalf of the employees. The options are to either make a 3% contribution to all employee accounts regardless of employee participation or provide a 100% match of the first 3% of employee contributions and 50% of the next 2%. Employees are not immediately vested in these employer contributions. The vesting schedule can take up to two years.

Why Would You Use Automatic Enrollment?

People tend to take the path of least resistance. If you enroll your employees in your plan, then the path of least resistance is to stay enrolled.  As the research shows, the main benefit of automatic enrollment is increased 401(k) participation.

Increased participation will benefit you and your plan in multiple ways. First, with more people saving, account balances increase, which can be beneficial for your plan. Your employees will be more confident in their financial futures, which will bring them peace and satisfaction. Also, if you do not have a “safe harbor” plan, increased participation will help you with your nondiscrimination testing. The more lower-level employees that are participating in a plan, the easier it will be for highly compensated employees to contribute the maximum for themselves. while the plan still passes all of the various tests required of it. 

How To Add Automatic Enrollment To Your Plan

If you want to add automatic enrollment to your 401(k) plan, it must be written into the plan document. The plan document is where all the rules that govern your plan can be found. As such, it needs to explicitly state the kind of automatic enrollment you want to implement and the related policies.

The next step after amending your plan documents is letting your employees know about it. By law, plan participants need to be notified and given a Summary Plan Description before you start automatic enrollment. You also must provide them with the same notifications on an annual basis thereafter. 

The best way to implement automatic enrollment is to take it a step further and educate your employees about it. If you show them the benefits of this new opportunity, they are more likely to get on board with a good attitude. 

Do You Need Help?

While sponsoring a retirement plan is a great benefit for both business owners and their employees, it does take time and efforts.  With so many rules and regulations, it can be intimidating to start one, much less make changes once you already have one in place.

If you like the idea of adding automatic enrollment to your plan but don’t have the time to go through the trouble of doing it yourself, we can help. Here at Fi-care, we help small businesses like yours run and amend their retirement plans and provide financial wellness for employees. Give us a call at (844) 377-4963 or email Fi-care@windgatewealth.comfor more information today. You can also book an appointment online to talk to us in person here.

About Sean

Sean Condon is a wealth advisor with more than a decade of industry experience. He specializes in helping entrepreneurs build a culture of financial confidence by offering their employees unprecedented access to a CERTIFIED FINANCIAL PLANNER™ professional. Taking an owner’s approach, Sean does his best to understand the many elements of his clients’ entrepreneurial journeys. He works in a technically competent and caring manner to reduce his clients’ anxiety about money issues and serves as a fiduciary by always putting his clients’ best interests first. Learn more about Sean by connecting with him on LinkedIn.

Information here is obtained from what are considered reliable sources; however, its accuracy, completeness, or reliability cannot be guaranteed. The data above is based on current laws that may change.  ERISA rules apply – check with your tax accountant or attorney for details.

Fi-care is a service offered by Windgate Wealth Management, a business line of Perritt Capital Management, Inc.  Perritt Capital Management is a registered investment advisor.  ADV documents are available upon request.

First published March 2019.