Do You Auto-Enroll Employees in Your 401k?

Paul McEwan | July 28th, 2010

Large employers are hesitant to institute automatic enrollment for their retirement savings plans, according to a recent survey conducted by AARP. Nearly 60 percent of the employers surveyed noted that they did not have automatic enrollment in the 401(k) plans.

AARP 401k Survey

AARP noted that the majority of employers were aware of the feature, which uses “human inertia” to work in favor of retirement planning by auto-enrolling employees in a company’s plan, and its potential benefits to help employees save more for retirement. The employers cited a number of reasons for not adopting the automatic features, including:

  • Concern that employees would not like automatic enrollment (20 percent)
  • Concern about costs (20 percent)
  • Contentment with the status quo (14 percent)
  • Lack of information (10 percent)

AARP surveyed business owners with at least 500 employees for the study. Only 16 percent of the employers noted that they would likely add the automatic enrollment feature in the next year.

In an automatic enrollment plan, all employees are enrolled into the 401(k) plan automatically, when they are eligible, with a certain deferral percentage – for example, 3 percent. Those who really do not wish to participate can still opt out of the program, but are required to take affirmative action to do so. Some auto enroll plans require that the payroll deduction percentage increase each year in 1 percent increments up to a maximum of 10 percent.

A benefit of this plan design is the increase in the average deferral percentage of rank and file employees. This results directly in the potential for higher deferral amounts for highly compensated employees that may otherwise have their own deferrals to the plan limited by the actual deferral percentage test.

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Your accounting professional can help you determine which auto enroll feature will support your business goals and help you implement the changes in your plan.

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