Historically, most employers that have sponsored 401(k) plans have required employees to decide whether to enroll in the plan. The Internal Revenue Service (IRS) has issued rulings to inform employers that it is okay under current law to enroll employees in these plans automatically, provided that the employee is notified in advance and is allowed to leave the plan if he or she chooses to do so.

Are your employees saving enough for their retirement? If they’re like many Americans, they aren’t. You may have heard recent news reports about the low savings rate in this country. Despite an increase in the number of workers that are offered 401(k) plans, studies have found that 30% don’t participate. Why such a high rate? Simple inaction is often cited as one of the main causes.

NADART began offering automatic enrollment to its plan sponsors in an effort to help its plan sponsors reverse this trend with their own employees. In offering this feature, NADART is following the lead of Congress, which passed legislation that makes it easier for companies to automatically enroll employees into their 401(k) plans once they become eligible. Under the automatic enrollment feature, employees will receive notice of the automatic enrollment provision prior to their eligibility date, and in subsequent years, notice of their rights under the plan.

How Automatic Enrollment Works
With automatic enrollment, the employer automatically enrolls an employee once he or she is eligible to participate in his/her 401(k) plan. The participant has the option to opt-out of the plan if he or she wishes, or change the contribution rate from the default option. The contribution rate might be set at 3% and then increases one percentage point each year until the participant reaches a contribution rate of 6%, but could be customized. Under the automatic enrollment feature, employees will receive notice of the automatic enrollment provision prior to their eligibility date, and in subsequent years, notice of their rights under the plan.

Improve participation and ease administrative burdens
Automatic enrollment has been shown to increase worker participation in 401(k) plans by 20 to 30%. In addition to improving participation in the plan, it can eliminate the need to chase down employees for enrollment cards and boosts the Non-Highly Compensated Employee average contribution percentage, therefore decreasing the possibility of Highly Compensated Employees receiving refunds when the annual Contribution Nondiscrimination Test is performed.

Your employees may thank you
By putting procrastination on the side of the future, your employees will accumulate more retirement savings. It encourages saving, but does not force it. Although an employee that did not elect to opt out of the plan automatically begins participating in the plan at a rate designated by the plan sponsor, that employee can still opt out at a later time or change the contribution rate if he or she so chooses.