Automatic Enrollment in Retirement Plans

May 16, 2022

Automatic enrollment provisions in retirement plans have become an increasingly popular way to help eligible employees save for retirement. Most 401(k) and 403(b) plans have an automatic enrollment feature that plan management can elect. Automatic enrollment provisions state that an eligible participant will be enrolled in the plan at a set deferral rate defined by the plan document unless they elect otherwise or decline participation prior to the date automatic enrollment becomes effective.

Example automatic enrollment plan provision: An initial pre-tax deferral contribution of 6% will be made for newly eligible employees 30 days after the employee’s plan entry date unless the employee makes an election otherwise or declines enrollment prior to that date.

Automatic enrollment may seem extremely beneficial, and if administered properly, it can be. However, sometimes plan management will not realize that implementing and monitoring automatic enrollment requires administrative process changes. If effective processes are not put in place, very costly corrections can result for the plan sponsor.

Implementation in the first year can be especially hard, depending on which employees automatic enrollment will impact. For example, a plan could choose to only implement automatic enrollment for newly eligible employees, which would be easiest, but would not enable current employee participation. To address this, plan sponsors will often choose to include active employees during implementation as well. For example, plan provisions could include all active employees that do not have an election on file. For all those participants that have never made an election or declination in the past, they will now need to make an election or decline or they will also be enrolled automatically. This requires you to communicate this to all active employees, identify who is impacted, and enroll them in a timely manner based on the plan provisions if they make no other elections. The process can get messy fast if not all those involved in implementation are on the same page and aware of the new provisions.

Common errors

  • Misunderstanding the plan provisions– While it may seem simple enough to understand automatic enrollment provisions, all plan documents are different and can word these provisions in various ways. Make sure plan management thoroughly understands the provisions before making the election and considers the potential impact such election will have on the administration of the plan. Once elected, make sure that all those administering the plan have a solid understanding of the provisions. Implement controls to ensure that the provisions are administered properly.
  • New member of plan management not made aware of the automatic enrollment provisions– When new plan management personnel are hired or tasked with new plan responsibilities, they should be given all the information necessary to properly administer the plan.
  • Tracking when a participant becomes eligible for automatic enrollment– While it may seem easy to determine when a participant becomes eligible, certain circumstances can make this difficult. For instance, if you have a larger than usual number of new hires or rehires, eligibility can get lost. Many plans will use a third-party provider to help with this tracking.
  • Relying on a third party to track automatic enrollment without implementing controls to ensure they are properly capturing participants– Often plan management will become accustomed to relying on a third party to track these dates, and they do not double check to ensure that there are no errors. Please remember that even though these services can help relieve the administrative burden, it is still plan management’s fiduciary duty to ensure that the plan provisions are properly administered. Establishing certain controls to check that third parties are properly identifying employees can help do this. Such controls can include reviewing a new hire list on a periodic basis to ensure they are properly captured for automatic enrollment.

Corrections for missed automatic enrollment

There are various considerations when making a correction for missed automatic enrollment. If you believe you have an automatic enrollment issue, please reach out to ERISA counsel, your auditor, and/or your third-party administrators to determine a proper solution as soon as possible. The amount of the correction can be significantly less if you take certain steps in a timely manner. Read the IRS 401(k) plan fix-it guide to give you an idea of what the corrections may look like.