Auto Enrollment Plan

Auto Enrollment Plan

Investopedia / Ellen Lindner

What Is an Auto Enrollment Plan?

An auto-enrollment plan is a retirement savings plan in which employees are automatically enrolled to contribute a certain amount of their salary each paycheck. 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).

In such plans, the employer decides what percentage of the employee’s paycheck will automatically be placed in a retirement account—typically 3%—and also decides whether to increase that percentage each year, perhaps by 1% per year until the employee is contributing 10%.

How an Auto Enrollment Plan Works

Automatic enrollment plans are intended to increase the number of workers who 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, and as a result, they miss out on employer-matching contributions when they’re offered, and they don’t set aside enough for retirement.

A 2018 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 Decision to Adopt Auto Enrollment

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 often are given many choices as to how their money can choose how their money is invested. 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 that 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.

Article Sources
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  1. Vanguard. "Automatic Enrollment: The Power of the Default," Page 1. Accessed Nov. 6, 2020.

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