Should I Use A 401k Automatic Enrollment Feature For My 401k?
If you’re a 401k plan sponsor or fiduciary, you should consider adding the 401k automatic enrollment feature to your plan. By automatically enrolling your employees into the plan, it will be far easier to get – and increase – your employee participation and satisfaction with your 401k plan.
Unfortunately, about 30% of workers don’t participate in their 401k plan at work. According to the Department of Labor, that number could be reduced by 15% with automatic 401k enrollment.
There are many advantages to automatically enrolling employees in your 401k plan:
- It’s essentially just like hitting the “401k easy button” by making employees opt out rather than opt in to the plan
- It increases employee participation in your plan
- You can set the allocation up to a conservative or moderate growth fund if the employee hasn’t made an election, this promotes their investment in more growth oriented vehicles versus just money market funds
- It provides a good tax benefit for your employees
- It grows your 401k plan faster, allowing you to achieve greater plan efficiencies and economies of scale (meaning the ability to negotiate lower 401k investment fees etc.)
How Do I Add The 401k Automatic Enrollment Feature To My Plan?
There are a few hurdles to cross if you don’t already have the automatic enrollment feature. You need to have a 401k plan established, but aside from that you need to notify the employees they’ll be enrolled into the plan at some nominal savings rate.
Automatic enrollment at a 3% savings rate is the most common. 3% isn’t nearly enough to prepare anyone for retirement (unless they’re independently wealthy), but it’s a starting point. 10% is a much better target to shoot for.
Once you notify them of their automatic enrollment in the 401k plan, you need to allow them to “opt-out” of the plan as well. Of course, employees always have the right to change their savings rate either increasing it or decreasing it from that 3% target rate.
401k automatic enrollment summary
If you want to boost participation in your 401k plan, the 401k automatic enrollment option is a great way to do it! By simply making employees withdraw from the plan rather than enroll in the plan, more participants will be inclined to leave something – even that nominal 3% rate – going into their retirement savings.