DEFINITION of 'Auto Enrollment Plan'

An employer’s decision to sign employees up to have a percentage of their paychecks automatically placed into a retirement savings and investment account. Auto enrollment plans don’t require the employee to take action or to explicitly consent to participate in an employer-sponsored retirement plan, like a 401(k). The employer decides what percentage of the employee’s paycheck will automatically be placed in a retirement account, perhaps 3%, and also decides whether to increase that percentage each year, perhaps by 1% per year until the employee is contributing 10%.

BREAKING DOWN 'Auto Enrollment Plan'

Automatic enrollment plans are intended to increase the number of workers who save for retirement. Pensions are no longer common, and it is usually up to employees to save for retirement. While many employers have established retirement savings plans, these plans usually require the employee to opt in and to choose what percentage of their paychecks to have their employer place in retirement savings. Many employees don’t take this step; as a result, they miss out on employer matching contributions when they’re offered, and they don’t set aside enough for retirement. A 2015 report from the investment management firm Vanguard found that, among the employer-sponsored retirement plans it managed, automatic enrollment significantly increased retirement plan participation by low-income employees, young employees and minority employees, as well as significantly increasing retirement plan participation by all employees.

Employers might decide to adopt auto enrollment to increase their employees’ retirement plan participation. When they do, they also need to choose a default investment for employees’ retirement plan contributions. Employers can limit their fiduciary liability by choosing lifecycle funds or balanced funds that are designed to help employees earn enough of an investment return to retire while taking the appropriate amount of risk for their age.

Even with auto enrollment, employees can choose how their money is invested, within the options the plan makes available. They don’t have to remain invested in the default option and they can direct future contributions to another option as well. They can also choose to change their default contribution amount — the percentage that is withheld from each paycheck — or opt out of contributing altogether.

Besides helping their employees, another incentive for employers to choose auto enrollment is that it increases the likelihood that, in the event the IRS audits the company’s retirement program, the IRS will find the plan in compliance with the nondiscrimination rules employers have to follow when they offer retirement plans.

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