Automatic Enrollment: Is It Right for Your Plan?
Is making employees contribute to the 401(k) plan a good idea? I get this question any time is plan sponsor is considering automatic enrollment as an option. The DOL and EBSA have a program for encouraging automatic enrollment plans for small businesses. Some people would argue that automatic enrollment helps plans with discrimination testing because all eligible employees are in unless they opt out. Others argue that automatic enrollment does not guarantee deferrals and real participation, plus it comes with the risks associated with default elections.
I recently read a study by Vanguard that found that, when automatic enrollment was used as a feature in defined contribution plans, participation rates for blacks rose from 57 percent to 94 percent after automatic enrollment, and 67 percent to 95 percent for Hispanics. They concluded that automatic enrollment reduced racial disparities in plan participation. Not exactly a necessary consideration for a plan sponsor, but as an employer, encouraging retirement savings by all employees (including minorities) seems to be a good thing.
The Vanguard study also found that, after automatic enrollment, about 75 percent of blacks and Hispanics remained in the default fund after automatic enrollment, compared to 68 percent of whites and 60 percent of Asians. Taking the race component out of the mix, consider that this means that when automatic enrollment is used, a significant portion of your participant population will probably stay in the default election chosen by the plan sponsor. That certainly puts a premium on the plan sponsor to make a thoughtful choice when electing a default option (if they go the automatic enrollment route). So adding automatic enrollment as a feature certainly suggests that a large portion of your participants are not going to "actively manage" their accounts. You have to carefully consider your fees and expense load in your default option as you can bet they won't.
So to answer the question, maybe. A decision to add automatic enrollment should be made based on a careful consideration of your population, current participation rates and the risks the plan sponsor is willing to undertake associated with choosing a default option. Plan amendments and plan documentation changes can be easily made to allow for it, but the longer term implications of requiring automatic enrollment have to be considered. I have recommended automatic enrollment, and also recommended against it, so I have to say neither one is absolutely better. If you are considering to add, not add or take it away, make sure you walk through it with your plan professionals before making the choice.
