How can I encourage participation?

Until passage of the Pension Protection Act in 2006 (PPA), participation in a 401(k) plan had always been completely voluntary. While that is still true technically, PPA, for the first time, allowed employers to adopt automatic enrollment which requires the employee to opt out of the plan if they do not wish to participate, where previously the participant had to opt in if they decided to take advantage of the plan. Many employers don’t view it as their role to tell employees what to do with their money and just don’t agree with the concept of automatic enrollment. But many employers have decided to go with automatic enrollment and have seen increased participation as a result.

Whether they are ready to do something about it or not, for the average person it is clear the need to put some money away for the future is a stark reality. A choice to not save is one of those choices that will most likely cause regret in hind-sight. As I tell people at enrollment meetings time is not renewable and time is a key and essential ingredient for retirement savings success. Saying I wish I had started earlier will not rewind the clock. Only you can make the decision to get started. I suppose a measure like auto enrollment strikes some balance between mandatory retirement savings, which has been considered from time to time in Congress, and providing the nudge that many people need to get them started. Getting started, overcoming that initial inertia is often responsible for many of the successes we have in life.

Automatic enrollment is not a substitute for participant education programs that have traditionally been the primary method of motivating employees to participate. Starting to invest for the future is truly only the beginning of the journey. The 401(k) plan is often the first exposure to investing that many employees have and a general understanding of how the markets work and more importantly, how investor behavior impacts investment returns is essential.

From the employer’s perspective while higher participation rates can help with passing non- discrimination tests, if the company offers a matching contribution having another 30% or 40% of your workforce contributing to the plan can increase the employer's cost of the plan substantially. Consider that it may also take contribution rates of 5% or more to really solve testing problems rather than the 3% rate which is a common starting point for automatic deferrals. So if making this move is viewed primarily as a tool to help with year-end tests the employer would want to make sure it actually accomplishes that goal.

So what else might become problematic with automatic enrollment? It creates another huge opportunity for your plan to be out of compliance. Since you are taking money out of the employee’s paycheck under the cover of the Pension Protection Act but with only the implied consent of the employee (rather than the explicit consent of voluntary enrollment) there are various notification requirements imposed by the PPA that must be followed. Failure to comply with the notification requirements can result in very substantial penalties. Technology helps with determining who needs what notice and when but when you have hundreds or thousands of employees it’s not hard to imagine missing a few people with one or more notices at some point. Not only does this seem possible but realistically missing someone is very likely. The penalty is up to $1,000 per day per person missed. Employers that adopt programs such as automatic enrollment need to know the rules and make sure the systems are in place to comply with those rules.

Automatic enrollment also involves selecting default investments – what if employees that are automatically enrolled fail to make investment elections? PPA helps plan fiduciaries with this problem by creating “qualified default investment alternatives” (QDIA’s). The investment oriented pages on our site talk about QDIA’s in more depth along with 404(c) (who is responsible for the outcome of participant investment decisions?).


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