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Automatic 401(k) Enrollment
One of the frustrations employers sometimes experience in the implementation of 401(k) plans is low participation rates. Lack of participation on the part of those who choose not to enroll in a company's 401(k) plan can have adverse consequences for two groups:
- Employees who choose not to enroll, as they forego the opportunity to build retirement savings, and possibly lose company matching dollars,
- Highly-compensated employees who are
enrolled in the plan, as the less than lower-paid employees
contribute to a 401(k) plan, the less highly-compensated
employees are allowed to contribute.
It always has shocked me that some people choose not to participate in a 401(k) plan, particularly when employer matching funds are given up by this decision. But it happens, and it happens quite a bit, particularly in the lower-paid ranks of employees. According to an article by Jim Barlow in the September 20, 1998 edition of the Houston Chronicle, one CPA firm's survey found that 90% of highly-compensated employees participate in 401(k) plans when they are available, compared to just 64% of lower-paid employees.
Employers now have another tool at their disposal to encourage participation rates. IRS Ruling 98-30 outlines how companies can structure a negative election feature (i.e., automatic enrollment), and still maintain a plan's tax qualified status. According to AccountingNet, "companies will not run afoul of the IRS as long as the employees have an "effective opportunity" to elect to receive cash instead of making a 401(k) plan contribution."
Apparently, automatic enrollment is effective at increasing participation rates. A Business Journal of Milwaukee article, reports that a year after J.C. Penney Co. of Plano Texas instituted automatic enrollment, plan participation jumped from "the low 70's" to 89% of employees. This is consistent with information reported in an Institute of Management and Administration article, which reports that 401(k) plans with automatic enrollment have a 90% participation rate, compared to 67% for 401(k) plans without automatic enrollment.
This is an idea that may be catching on. Before the ruling, according to the Institute of Management and Administration article, only 3% of plan sponsors employed automatic enrollment, but 43% of the Profit Sharing Council of America (Chicago) respondents to a survey expressed interest learning more about automatic enrollment. With the new IRS ruling, one might expect interest levels to increase further.
As seems to be the case with so many regulations, there are hurdles to overcome to implement such a plan. If you are considering the implementation of automatic enrollment, you should consult a qualified plan advisor.
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