Strengthen Plan Participation with Automatic Enrollment
Workers can cite endless reasons for not participating in a retirement plan. But employers can take simple steps to help turn around low participation rates. This, in turn, can help a plan satisfy compliance testing, and potentially allow business owners and the highly compensated to save more in the plan. Recent research shows that workers who are automatically enrolled in a plan tend to stay enrolled. Research also shows that participation rates can exceed 90 percent for a plan that uses automatic enrollment, compared with participation rates of around 50 percent for plans without automatic enrollment. The conclusion is clear: enrolling participants automatically effectively increases plan participation.
Out of Sight, Out of Mind
According to the federal Bureau of Labor Statistics (BLS), more than half of employer-sponsored 401(k) plans feature automatic enrollment. Automatic enrollment works on this basic premise: if eligible employees do not make a deferral contribution election, they are automatically enrolled at a deferral percentage defined in the plan document. Plan participants can always change this default contribution amount—usually between 3 and 6 percent of pay—but it will remain in place if they do not make their own election. Employers may also want to implement an annual contribution increase for automatically enrolled employees, such as a 1 percent deferral increase on the first day of each plan year.
The BLS report holds more good news for employers: most workers who are otherwise reluctant to actively opt in to a retirement plan on their own tend to remain enrolled if they were automatically enrolled. This is an easy, hands-off way for workers to save for retirement without having to invest much time or thought. Because they are automatically enrolled, they are automatically saving for retirement.
Multiple Options
Employers may elect to adopt one of three automatic enrollment options. The most basic option is known as an automatic contribution arrangement (ACA). An ACA can be adopted at any point during a plan year, and may apply to new employees, current employees, or both. Implementing this simple option not only boosts workers’ savings, but it can also improve a plan’s annual compliance test results.
The second option is known as an eligible automatic contribution arrangement (EACA). An EACA is the same as an ACA, but must be maintained for the entire plan year. If an EACA applies to all employees, the employer benefits from an extended deadline for removing certain excesses from its plan, and automatically-enrolled employees who do not wish to participate may request permissible withdrawals of amounts that were withheld from their pay.
The third option is known as a qualified automatic contribution arrangement (QACA). A QACA offers all of the benefits of automatically enrolling employees, plus it enables the employer to avoid some types of compliance testing if certain required employer contributions are made and notice requirements are met.
The type of automatic enrollment feature that best suits a retirement plan depends on the makeup of the company’s workforce, the employer’s saving and benefits objectives, and other plan-design considerations.
The Best Solution?
Automatically enrolling employees can be a cost-effective approach to increasing plan participation. Participation rates jump immediately with this feature, and workers seem to embrace it. And although they can easily opt out, they usually don’t.
Automatically enrolling employees can help solve low voluntary enrollment concerns. But employers may need to take into account other factors when considering the addition of an automatic enrollment feature. They should discuss any plan changes with their third-party administrator or other advisors before amending their plan. Just remind your clients with retirement plans not to overlook the benefits of helping themselves and their employees with automatic enrollment.
