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    4 Steps for 401 (k) Automatic Enrollment

    In 2006, the Pension Protection Act enabled employers to automatically enroll their employees in a 410(k) plan. Since then, businesses have increasingly been automatically enrolling their new team members into 401(k) plans during their onboarding process.

    After employees are automatically enrolled, they then have the option to either change their default contribution rate or to decide not to participate in their retirement savings plan. This helps to overcome employees’ inclinations toward inaction or procrastination, which can happen as a result of workers being overwhelmed by the complex or overwhelming information retirement plans provide.

    According to Forbes, 46% of retirement plans use automatic enrollment—up from 20% in 2008. For larger companies, 65% of plans with 5,000 or more participants use auto enrollment. Using the same data, researchers found that a staggering 92% of employees participated in automatic enrollment plans instead of opting out, while only 57% of employees enrolled themselves in voluntary 401(k) plans.

    One of your first decisions will be whether you want to set up the plan yourself or partner with a professional or financial institution to help you launch and maintain it. According to the Department of Labor, there are four initial steps for setting up an automatic enrollment 401(k) plan:

    Step 1: Adopt a Plan Document

    Your company’s 401(k) plan will begin with a written Plan Document that complies with IRS Code and outlines the details of your retirement plan. If you opt to consult with a professional, they will typically provide this document. The Plan Document will function as a blueprint for the day-to-day operations. It is in this document that you should specify what type of automatic enrollment 401(k) plan you will be adopting.

    Basic Enrollment 401(k) Arrangement (ACA)

    Eligible employees are automatically enrolled at a predetermined contribution rate. These employees then have the opportunity to change their contribution rates or can choose to not participate in a 401(k) retirement savings plan.

    Eligible Automatic Contribution Arrangement (EACA)

    Like the ACA, employees under this arrangement are automatically enrolled in a 401(k) plan and then have the option to make changes or opt out. The main difference between the two is that the EACA allows employees to request a refund or a deferral within the first 90 days that they are eligible to participate in the 401(k) plan.

    Qualified Automatic Contribution Arrangement (QACA)

    A QACA employs the same features as the ACA, and also requires both an annual employer contribution and an increase in the employee contribution rate for each year the employee participates.

    Once you choose your plan, the company must provide a summary plan description (SPD) to all participants. The SPD typically is created with the plan document and provides comprehensive information to participants and beneficiaries about the plan and how it operates.

    Step 2: Arrange a trust for the plan’s assets

    In order to ensure that the plan’s assets are only used to benefit the participants and their families, they must be held in a trust. The trust must employ one or more trustees to oversee contributions, distributions, and plan investments. This is a hugely important decision when it comes to setting up your company’s 401(k) automatic enrollment plan, because it’s financial integrity will largely depend on the integrity of the trustee that you choose.

    Step 3: Develop a system for recordkeeping

    There are a lot of ins and outs to a company’s 401(k) plan. As such, it is crucial to develop an accurate system for tracking and recording contributions, distributions, investments, earnings and losses, expenses, and employee participation. A diligently kept record system will also help you or your plan manager prepare the plan’s annual report for tax purposes and keep up with compliance concerns.

    Step 4: Provide plan information to employees eligible to participate

    Legally, employees who are eligible to participate in the company’s 401(k) plan must be notified about their rights as a participant in the program, as well as information about certain benefits and features of the plan. Communication with employees must include an initial notice prior to automatic enrollment in the plan and receive a similar notice each year. You should plan to provide information periodically to plan participants to inform them about investments and plan changes. Fees associated with the account must also be communicated to participants.

    Setting up a 401(k) retirement plan for your business can be a complex task, but you don’t have to tackle it on your own. Consider partnering with SWBC. We can help you get started, choose and manage your plan, and take you through the process of setting up 401(k) auto-enrollment for your company. Click here to learn more about our retirement plan development services!

    Mark Travis

    As Senior Financial Advisor for SWBC, Mark Travis has built long-term client relationships by providing comprehensive financial expertise, service, and oversight. Mark is well versed in helping clients solve complex and unique financial challenges, especially in his work with high-net-worth individuals, charitable entities, ERISA-covered defined benefit plans, and defined contribution plans. Mark holds the Chartered Retirement Planning Coordinator (CRPC®) designation; FINRA Series 7, 31, and 66 licenses; and Texas life and health insurance license.

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