Auto-Enroll 401(K)S: The Power Of Default Investing

Automatic enrollment is a retirement plan feature common in 401(k) plans but can also be in one of the other plan types listed below that permit employees to make elective contributions. When employees are automatically enrolled in a retirement plan, they may not realize how much they’re actually contributing.

Auto-enrollment increases participation

Automatic enrollment is a retirement plan feature common in 401(k) plans but can also be in one of the other plan types that permit employees to make elective contributions. Automatic enrollment increases participation, thereby making it more likely that a plan will pass the test. Federal law addresses concerns employers may have about potential liability for their investment choices when participants do not provide direction and the employer deducts employees’ contributions from their paychecks without prior approval.

When employees are automatically enrolled in a retirement plan, they may not realize how much they’re actually contributing. They may not know that their elective deferrals are relatively low, and those deferrals may not provide enough of a nest egg to retire in comfort.

Automatic enrollment 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.

Though many employees will be automatically enrolled, participants have the opportunity to opt-out of their company’s 401(k) plan or to contribute more. You can customize your 401(k) or 403(b) contributions if the automatic options don’t suit your preferences and risk tolerance.

Automatic enrollment increases the number of employees that are eligible for matching contributions, it may increase expenses for the employer. The employer also auto-enrolls employees into a default investment plan, typically a target-date fund. The employee has to take action to modify that choice, and some workers may not realize they can do so or know what other options are available.

Employers auto-enroll employees into a default investment plan

Automatic enrollment is a retirement plan feature common in 401(k) plans but can also be in one of the other plan types that permit employees to make elective contributions. Employers can "enroll" eligible employees in the retirement plan automatically unless the employee affirmatively elects not to participate. The employer automatically reduces an employee's wages by a plan-specified default percentage and contributes that amount to the employee's plan account as an automatic enrollment contribution.

Implementing automatic enrollment for your company’s 401(k) or similar retirement plan can do just that for you and your employees. 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. High-value employees and qualified prospects alike expect to be offered some type of retirement savings vehicle in their benefits package.

Though many employees will be automatically enrolled, participants have the opportunity to opt-out of their company’s 401(k) plan or to contribute more. You can customize your 401(k) or 403(b) contributions if the automatic options don’t suit your preferences and risk tolerance.

Automatic enrollment 401(k) plans set up as QACAs are not subject to this annual testing. Federal law addresses concerns employers may have about potential liability for their investment choices when participants do not provide direction and the employer deducts employees’ contributions from their paychecks without prior approval. You can automatically invest employee contributions in certain default investments that generally offer high rates of return over the long term.

Higher expenses for employers that offer matching contributions. Because auto-enrollment increases the number of employees that are eligible for matching contributions, it may increase expenses for the employer. Poor investment selection. The employer also auto-enrolls employees into a default investment plan, typically a target-date fund. The employee has to take action to modify that choice, and some workers may not realize they can do so or know what other options are available.

Employees can opt-out of their company’s 401(k) plan

Automatic enrollment for a company's 401(k) plan means that employees are enrolled automatically in the employer-sponsored retirement plan unless they proactively choose to opt out. This is a common feature of 401(k) plans and other retirement plans that permit employees to make elective contributions.

Employees can opt-out of their company's 401(k) plan at any time. They can also change their contributions later on. This is a welcome change for many workers who don't take advantage of the program.

Automatic enrollment has many benefits for both employees and employers. It increases participation and makes it more likely that a plan will pass the test of ensuring that the contributions made for rank-and-file employees are proportional to contributions made for owners and managers.

Employees may not realize how much they’re actually contributing to their 401(k) plan. They may not know that their elective deferrals are relatively low, and those deferrals may not provide enough of a nest egg to retire in comfort.

Employers may also have concerns about potential liability for their investment choices when participants do not provide direction and the employer deducts employees’ contributions from their paychecks without prior approval.

Auto-enrollment increases the number of employees eligible for matching contributions

Automatic enrollment is a retirement plan feature common in 401(k) plans but can also be in one of the other plan types listed below that permit employees to make elective contributions. Automatic contribution arrangements allow employers to "enroll" eligible employees in the retirement plan automatically unless the employee affirmatively elects not to participate. "Enroll" means that the employer contributes part of the employee's wages to the retirement plan on the employee's behalf. The employer automatically reduces an employee's wages by a plan-specified default percentage and contributes that amount to the employee's plan account as an automatic enrollment contribution.

Automatic enrollment increases participation, thereby making it more likely that a plan will pass the test. Basic automatic enrollment 401(k) plans and most EACAs are subject to annual testing to ensure that the contributions made for rank-and-file employees are proportional to contributions made for owners and managers. Federal law addresses concerns employers may have about potential liability for their investment choices when participants do not provide direction and the employer deducts employees’ contributions from their paychecks without prior approval.

Implementing automatic enrollment for your company’s 401(k) or similar retirement plan can do just that for you and your employees. 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. 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. High-value employees and qualified prospects alike expect to be offered some type of retirement savings vehicle in their benefits package.

When employees are automatically enrolled in a retirement plan, they may not realize how much they’re actually contributing. They may not know that their elective deferrals are relatively low, and those deferrals may not provide enough of a nest egg to retire in comfort. Higher expenses for employers that offer matching contributions. Because auto-enrollment increases the number of employees that are eligible for matching contributions, it may increase expenses for the employer.

Employees may not realize how much they’re actually contributing

Automatic enrollment is a common feature in 401(k) plans that allows employers to enroll eligible employees in a retirement plan automatically unless the employee affirmatively elects not to participate. This means that employees may not realize how much they are actually contributing to their retirement savings.

When employees are automatically enrolled in a retirement plan, they may not know that their elective deferrals are relatively low and that these deferrals may not provide enough of a nest egg to retire in comfort. Employers also auto-enroll employees into a default investment plan, typically a target-date fund. The employee has to take action to modify that choice, and some workers may not realize they can do so or know what other options are available.

Automatic enrollment increases participation, thereby making it more likely that a plan will pass the test. However, it may also increase expenses for the employer because it increases the number of employees that are eligible for matching contributions.

Federal law addresses concerns employers may have about potential liability for their investment choices when participants do not provide direction and the employer deducts employees' contributions from their paychecks without prior approval. You can automatically invest employee contributions in certain default investments that generally offer high rates of return over the long term.

Employees have the opportunity to opt-out of their company's 401(k) plan or to contribute more. You can customize your 401(k) or 403(b) contributions if the automatic options don't suit your preferences and risk tolerance.

Frequently asked questions