Benefits of automatic enrollment in a retirement plan

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Artificial intelligence (AI) may be all the rage these days, with multiple reports coming out almost daily highlighting the benefits of AI on both professional and personal levels. But before we had AI, we had automation.

Automation has improved (and continues to improve) our world in multiple ways. Think about it—automation crept into our lives in a subliminal way but has since come to play a pretty big role in our lives, whether we realize it or not. Automatic doors open for us when we’re ready to enter or exit a building, regardless of how full our hands are. Automatic walkways ease some of the stress we feel when trying to make it to our gate on time in a crowded airport. Google uses automation to finish our sentences and help us find what we’re looking for before we’ve even typed out an entire search term. And automatic reminders for things like oil changes and doctor appointments simplify our chaotic schedules and keep us on track with our day-to-day responsibilities.

Wouldn’t it be nice if there was a tool that could do the same thing when it comes to safeguarding our financial future? Simplify the savings process to better keep us on track to reach our long-term goals?

Well, implementing automatic enrollment for your company’s 401(k) or similar retirement plan can do just that for you and your employees.

Reasons to utilize automatic enrollment with your company’s retirement plan

Automatic enrollment essentially works just as you would imagine—your employees (when eligible) are enrolled automatically in your employer-sponsored retirement plan unless they proactively choose to opt out. There are many benefits of implementing such a program, which is probably why the feature is getting more and more popular.

401(k) auto enrollment pros and cons

Although the key benefits of implementing automatic enrollment in a 401(k) plan mainly surround the employee, there are certain advantages for the employer as well.

Automatic enrollment benefits for plan sponsors:

  • Helps attract and retain valued employees

    It’s no secret that high-value employees and qualified prospects alike expect to be offered some type of retirement savings vehicle in their benefits package. Take it one step further by offering a 401(k) with auto enrollment to show your current and prospective employees that you truly care about helping them prepare for their financial future and reach their retirement goals.

  • Improves non-discrimination testing results

    Things are about to get a little technical, so hang in there.

    Unless the plan meets certain contribution requirements to be a safe harbor plan, plans are required to undergo yearly testing to ensure they don’t discriminate in favor of business owners or employees with higher incomes. Non-discrimination tests require that highly compensated employees (HCEs) and key employees (like business owners or organization leaders) stay within a specific contribution rate, which is determined by the contribution rates among non-highly compensated employees (NHCEs). The tests are designed to even the playing field between lower income workers who struggle to save and HCEs who can afford to max out their retirement account each year.

    So how exactly does automatic enrollment help with non-discrimination testing?

    A disproportionate percentage of employees who aren’t participating in the plan are lower income or minorities, and auto enrollment can increase participation rates dramatically. When these groups aren’t participating in the plan, the average contribution rate among NHCEs is brought down—which can have a direct effect on the contributions HCEs and key employees are allowed to make. High participation rates with adequate contribution levels can help balance assets from HCEs and NHCEs, improving the likelihood that a plan will pass top-heavy testing and other non-discrimination tests.

  • It’s easy

    Once the initial setup is complete, automatic enrollment becomes fairly hands-off for the employer. Eligible employees are automatically enrolled in the plan with a default contribution rate, which simplifies the enrollment process on the employer’s end and encourages steady saving habits among employees.

    Clearly, there are benefits to adopting auto enrollment for your 401(k) plan. But that doesn’t mean there aren’t also some things to consider before deciding to do so.

Potential downsides of automatic enrollment in a retirement plan:

  • Declining contribution rates

    We’ve covered in detail how auto enrollment can help increase the number of employees participating in a retirement plan, but employees participating in an auto enrolled plan tend to contribute less than those who proactively sign up for such a plan. This may be, in part, because employees who voluntarily sign up to save for retirement are probably more engaged and in-tune with their savings goals than those who are automatically put in the plan. But employers may also be partly to blame.

    When employers implement a 401(k) plan with automatic enrollment, they choose a contribution level that automatically-enrolled employees default to, and oftentimes, the default rate is too low to adequately reach savings goals. And that’s not to say that picking a default contribution rate is easy or straightforward. Set it too high and people will opt out of the plan; set it too low and employees may not have a good shot at reaching their savings goals.

Do employees benefit from automatic enrollment in a 401(k)?

Automatic enrollment can be beneficial to all involved, taking indecisiveness and procrastination out of the picture by enrolling employees as soon as they are eligible to join the plan. Plus, when appropriate default investment selections are made, a 401(k) can be an effective tool at generating large account balances, which can only help those enrolled in the long run. And since businesses also benefit from adopting automatic enrollment with their 401(k), it’s really a win-win all around.

To learn more about implementing an automatic enrollment 401(k) for your business, give us a call at 800-345-6363.