Volume 9 Issue 2007

If your company has a 401(k) retirement savings plan, you know how hard it can be to increase plan participation. Some employees think they can't afford to save for retirement. Others don't understand the benefits of participating. Still others simply don't bother to join the plan.

Adding an automatic enrollment feature is one approach that employers are using to boost participation. The Pension Protection Act of 2006 contains some provisions designed to encourage automatic 401(k) enrollment.

How It Works

With automatic enrollment (sometimes called "negative election"), a preset percentage of an employee's pay is deferred to the plan through payroll withholding as soon as the employee becomes eligible for plan participation — unless the employee elects to receive cash (opts out) or elects to have another amount contributed. For example, let's say a plan provides for an automatic enrollment contribution of 3% of pay. The employer would notify employees of the arrangement and of their right to choose not to contribute or to choose a different deferral percentage. Absent an election to the contrary, eligible employees would be automatically enrolled at 3%. If desired, the plan could also provide for automatic increases in the contribution percentage at preset intervals.

Incentives in the New Law

The 2006 pension law provides several incentives for sponsoring employers to adopt automatic enrollment in their 401(k) plans. These include:

• Elimination of conflicts with state laws on wage withholding without employee consent;

• "Safe harbor" rules that would allow a complying plan to avoid nondiscrimination testing with lower employer contributions than are required under the current law's safe harbor matching arrangement;

• Additional time to test for discrimination and, if needed, make corrective distributions if the safe harbor is not used; and

• Fiduciary liability relief with respect to default investments.

These changes apply to plan years beginning on or after January 1, 2008. If you believe automatic enrollment could enhance your company's plan, it could be a good time for you to look into it.