In Vanguard’s “How America Saves 2017” report, they cited a 300% increase in plans offering automatic enrollment since year-end 2007! If your plan is considering adopting the automatic enrollment provision, here are some common myths you should address.
- 6% is too high to start the deferrals
The fear that most plan sponsors have with starting automatic enrollment at an amount over the commonly accepted 3% is that the amendment will be met with ill will from the employees and/or the amount will be too much for the employees to afford. However, research has shown the opposite of that to be true. According to the 2014 PLANSPONSOR Defined Contribution survey, plans with a 5-6% default deferral rate have a 90% participation rate which is 13% higher than the national average.
- My participants will be ready to retire
Even though 3% is better than nothing, it will not get your participants ready to retire if it is the only form of savings they take advantage of. It may be worthwhile to take a look at adding an auto-escalate provision which would increase deferral percentages up to a certain number. For instance, the provision could read “every January 1st, all automatically enrolled participants deferral percentages increase by 1% until a 10% deferral percentage is achieved.”
- It will immediately help annual compliance testing
More than likely only automatically enrolling newly hired employees will not have a significant impact on your plan’s annual compliance testing since it does nothing to address the employees that are not currently participating. With that in mind, your plan may want to consider including all eligible employees in the automatic enrollment which may have a more immediate positive impact.
- It costs nothing
While it is true there may only be a nominal document amendment fee to add the automatic enrollment provision, a company that offers a match needs to consider what an increase in participation will do to the company match commitment.
Automatic enrollment is here and gaining popularity and, in most cases, is a great addition to a company’s 401(k) plan as long as you completely understand what it is and isn’t before making the change. If you would like to discuss the potential impact that auto-enroll would have on your plan, please call me at 205-970-9088 or email me at firstname.lastname@example.org.