Auto-enrollment is great for your employees.
It helps with one of the challenges we all face: inertia.
Instead of slogging through a complicated process to enroll in your 401(k), they know their money’s working for them from the start.
That often makes a big difference after retirement. Millions of Americans face the prospect of getting by with about $1,000 a month from Social Security—not easy even in the best of times.
With a 401(k) plan, time spent as part of your team is an investment.
Auto-enrollment works. But many plans fail to administer it properly.
Like any part of your 401(k) plan, auto-enrollment oversights can cost you.
Let’s consider some common mistakes:
1. Too much left to interpretation
Let’s say your plan makes employees “immediately eligible.”
Sounds easy, right? But there’s a lot left to the imagination.
Do you automatically start taking 6%? Do you give them a month to decide if they want 6%, more, less, or nothing at all? Clear regulations are key—spell it all out in the plan document.
For instance:
- Within 30 days of hire, new employees are in the plan at 6% by default;
- Or they need to put a requested amount in writing by a given deadline.
Which leads to another issue—
2. Not enough in writing
For every change an employee makes to their 401(k), you need written evidence. Otherwise, it’s your word versus theirs. When businesses can’t produce a “paper” trail, regulators tend to side with employees.
What if an employee just isn’t communicating? The long and short of it is, they need to. Take any steps needed to get (and record) their input.
If employees don’t specify what they want, exactly what happens next should be specified in plan documents, including whether they’re auto-enrolled and at what level. That means no surprises.
3. Problems with auto-escalation
In auto-escalation, the employee’s plan contribution goes up on the annual anniversary date. Employees might start auto-enrolled at 6% and rise 1% per year until they reach 10%, for example.
It’s easy for companies to forget auto-escalation, especially when employees’ anniversaries correspond with their date of hire. Your auditor will thank you if all auto-escalation takes place January 1st.
For a successful 401(k), you need the right policies in place—and consistent, accurate enforcement of those policies.
For insight from an experienced plan auditor, Contact Cassell Plan Audits today.
