Are your employees going to be ready for retirement? Employee-funded 401(k) plans run the obvious risk that employees will fail to save sufficient amounts to protect their financial security in retirement.
The Pension Protection Act of 2006 (PPA) has provisions encouraging Plan Sponsors to adopt automatic enrollment provisions for their 401(k), 403(b) and 457(b) plans. Many larger employers are doing this already, and the provisions in this bill encourage the practice by all employers.
How does automatic enrollment work?
- Notice – Employees are notified 30-days prior to the date that deductions from payroll will begin and they will be entered into the plan.
- Opt out paperwork – if the employee does NOT want to have payroll deductions, he must complete a form opting out of the program. Research shows that very few opt out, usually fewer than 10%.
- Deductions begin – The payroll department starts withholding a set amount of compensation for the employee (usually between 3% and 5%), and remitting the contributions to the plan.
- Account established – The participant’s funds are deposited into the plan’s “default” account. This is likely some type of asset allocation mutual fund, or target date mutual fund. No longer is money market considered a reasonable alternative.
- Employer contributions – Employer contributions are optional under most Automatic Enrollment plans. Qualified Automatic Enrollment Arrangements (QACA) carry mandatory employer contributions, and offer some benefits to the employer.
- Making changes – the participant may elect to change the amount of the deferral, or the investment selections as allowed by the plan document and the investment custodian.
- Annual increases to deduction – Some employer are taking this automatic enrollment concept a step further and increasing the participant’s deferral by 1% or 2% per year, up to a cap of 10% of compensation.
There are pros and cons to implementation of the program. At Benefit Resources we think this concept can make a positive impact on the retirement savings accounts of many of our nation’s workers. See the chart outlining the options, and contact us to learn more about how it can help your plan.
Automatic Enrollment – Plan design ideas
- Split enrollment between elective and automatic to avoid short-term employees
- Consider improved participation as an alternative to Safe Harbor
Table to compare various types of Automatic Enrollment plans
|
Feature
|
Automatic Contribution Arrangement (ACA)
|
Eligible ACA (EACA)
|
Qualified ACA
(QACA)
|
|
Negative enrollment of eligible employees
|
Yes
|
Yes
|
Yes
|
|
Applies to newly eligible only
|
Optional
|
No
|
Optional
|
|
Employer Safe Harbor contribution
|
Optional (Traditional Safe Harbor)
|
Optional (Traditional Safe Harbor)
|
Yes. 3% non-elective, or Match 100% on 1%, 50% on next 5%
|
|
Minimum deferral amount
|
Any %
|
Any %
|
At least 3%
|
|
Automatic deferral increase
|
Optional
|
Optional
|
Yes (6% by year 3, 10% maximum)
|
|
Vesting
|
Traditional rules
|
Traditional rules
|
2-year cliff
|
|
Notice requirement
|
Yes
|
Yes
|
Yes
|
|
ADP/ACP testing required
|
Yes (unless Safe Harbor)
|
Yes (unless Safe Harbor) 6-month correction period
|
No (if Safe Harbor contributions only)
|
|
90-day opt out available to new participants
|
No
|
Yes. No 10% penalty, reported on 1099R. Fee may apply.
|
Yes. No 10% penalty, reported on 1099R. Match is forfeited.
|
|
Qualified Default Investment Arrangement
|
Optional
|
Yes
|
Yes
|
