Adopting Automatic Enrollment in Your Retirement Plan

Ellen Alphonso

“Automatic enrollment almost doubles plan participation and successfully gets participants who might not have otherwised saved saving,” according to Joshua Dietch, Head of T. Rowe Price Retirement Thought Leadership, and Taha Choukhmane, Ph.D. MIT Sloan School of Management Associate Professor of Finance in their report, “Automatic enrollment’s LongTerm Effect on Retirement Saving. Congress agreed whole-heartedly; SECURE 2.0 includes a provision that requires most 401(k) and 403(b) plans, formed on or after December 29, 2022, to include an auto-enrollment function. Whether your employer sponsored plan is subject to the auto-enrollment provision of SECURE 2.0 or you wish to maximize participation in the plan, there are a few key questions to consider before enacting an auto-enrollment provision in your plan.

If you are subject to SECURE 2.0, does your proposed autoenrollment provision meet the requirements?

Per the provisions of this act, an auto-enrollment provision must include the following:

  • Eligible automatic contribution arrangement (EACA)- this arrangement requires that the Employer uniformly apply the plan’s default automatic contribution percentage after giving required notice and permit the employee to withdraw those automatic contributions within 30-90 days of the employee’s first automatic contribution.
  • An initial contribution rate of 3%-10%.
  • An auto-escalation feature, in which, absent the participant’s election otherwise, the contribution rate will increase 1% per year until reaching 10%-15%.
  • A qualified default investment alternative feature for participants who do not make an investment election.
  • Employees must be permitted to set their own contribution rates or opt out of making contributions to the plan all together.

How do you ensure all eligible employees are automatically enrolled into the plan? Just as importantly, how do you ensure non-eligible employees are NOT enrolled into the plan or people can effectively opt out?

Not following the provisions set by the plan’s documents could place a retirement plan’s tax-preferential treatment at risk. During our employee benefit plan audits at Boyum Barenscheer, we see many errors related to not properly setting up an auto-enrollment process in the onboarding and payroll systems.  So before placing an automatic enrollment provision into place, it is important to consider your key benefit processes and controls.

Many major plan service providers can assist you by tracking the eligibility dates and automatically applying initial contribution rates and annual auto-escalation increases.  Most often, this is coordinated through accurate uploads of payroll feeds that include hire and termination dates from the employer, which is then processed by the service providers, who will then inform the employer of any required updates to the payroll system.  In some instances, these updates to payroll can be made automatically, with the proper integration of the payroll system and retirement plan provider.  This automatic integration of the systems can greatly reduce the administrative burden of staff who would normally update the information in the payroll system, ultimately lowering the risk of manual errors in auto-enrollment and contribution rate.  For companies and organizations who want an automatic integration of their payroll and service providers, but do not have the IT resources to customize their systems, there are third-party administrators that can offer payroll integration for a low monthly cost.

If payroll integration is not a possibility for your company or organization, set a regular review of employee eligibility to actual contributions to your plan’s service providers.  Missing a deferral opportunity for an employee can be a costly error; employers could be required to contribute up to 50% plus lost earnings for the missed deferral opportunity. Setting a regular and timely review is key to preventing costly corrective action to your participant’s accounts.  Keep in mind that the IRS has provided relief for employers who mistakenly exclude eligible employees from auto-enrollment, generally if the error does not extend past 3 months. So, a regular review of eligibility and enrollment at least quarterly is key to avoiding additional costs to the company or organization.

No matter the size of plan, Boyum Barenscheer can tailor procedures that help ensure compliance with your plan’s provisions or ready you for the adoption of auto-enrollment provisions. Contact our team for help.


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