Automatic Enrollment Doesn’t Put Your Organization’s Retirement Plan on Autopilot
While adopting an automatic provision is as easy as amending your plan document or adoption agreement, implementing the feature requires you to rethink the way your personnel processes employees’ plans.
Many employers opt to roll out an automatic enrollment feature for their benefit plans (e.g., 401k and 403b) to increase participation in the plan, sometimes for purposes of satisfying the Actual Deferral Percentage and Actual Contribution Percentage tests and to help employees save for retirement.
But many plan sponsors have the common misperception that automatic enrollment provisions will require little, if any, payroll and human resources personnel interaction. This assumption can be costly later when you discover that some of your employees were never enrolled in the plan, leaving you to pick up the cost of the correction (e.g., missed elective deferrals, missed employer matching contributions, and lost earnings). Setting up the feature correctly from the start can help you avoid these types of unwelcome surprises down the road.
Which employees should be automatically enrolled?
Many employers opt to apply automatic enrollment provisions prospectively for new hires, and leave all current employees at their existing deferral rates (or no deferrals if they never elected to participate in the plan). But this approach runs counter to the reasons for instituting automatic enrollment.
If automatic enrollment provisions are applied only to new hires, the impact to your plan will be greatly reduced.
Best practices for testing your automatic enrollment provisions
Your team should thoroughly test your new process for several pay periods to make sure it is working as expected. Based on our experiences with clients who are implementing this feature into their plan, here are a few best practices to help you get started:
- Complete monthly or quarterly reviews of employee status changes — A regular check in can help you make sure that all eligible employees are included in the automatic enrollment process.
- Spot-check — As part of your recurring human resources and payroll processes, select a sample of participants and review if the correct percentages are being withheld from payroll.
- Use a predictive test template — This test will select a number of employees each period and compare their deferral to what was withheld from payroll, as well as the custodial reports, to ensure consistency. Separate people can perform each component of the predictive test.
- Self-audit all records for a payroll quarter — Check that eligible employees were properly enrolled at the correct deferral percentages, and that any employees without elective deferrals have the proper opt-out paperwork (or verification, if done through an online portal) to substantiate their affirmative decision not to participate in the plan.
Prioritize reporting new hires to your record keeper
Previously, your employees were responsible for signing up to participate in your plan. With an automatic enrollment feature, you will no longer provide enrollment information to employees and wait for them to respond, but instead will report new hires (with accurate new hire dates) to your record keeper in a timely manner so that all employees are enrolled in the plan when they reach eligibility requirements. The only action an employee will initiate is signing an opt-out form (which will generally be on an exception basis).
You’ll need to know how your service providers (record keeper and custodian) will be processing automatic enrollment information, and how they will notify you if an employee is either going forward with the automatic deferral percentage under the plan or has indicated a different deferral percentage.
The way this information is communicated will help you design effective monitoring processes to make sure all deferral percentages are properly entered into the payroll system and deducted from the employee’s wages.
Transition to automated filing
Automatic enrollment may require your organization to transition away from manual processes, such as accepting paper-based enrollment forms for individuals who want to elect a deferral percentage other than the default.
Employers that continue to give employees the option to enroll in the plan in different ways (e.g., the recordkeeping platform and via paper-based forms processed by the employer) often find themselves correcting enrollment errors, or, in some cases, correcting “missed” enrollments that occur when paperwork is misplaced or filed prior to being processed. In a time when business is moving toward automation, it is vital to have updated and standardized processes for your plan so that all enrollments occur in the same fashion.
Think through automatic escalation provisions
When adopting automatic enrollment or escalation features, take the time to understand the details and intricacies of these provisions. If you are including an automatic escalation provision for your plan, you will need to know if the provision “kicks-in” for participants who are deferring less than the maximum specified in the plan.
For example, if automatic enrollment is adopted for 3 percent initially, then 1 percent more each year until a maximum of 10 percent is reached, what happens to participants who elect a 4 percent deferral rate upon hire? Are the participants enrolled at 4 percent and never escalated, or would the percentage be escalated after the second year so that they reach a 5 percent deferral rate as if they had been automatically enrolled?
Thoughtfully select your deferral percentage
The initial deferral percentage should be a meaningful amount that helps achieve your plan’s goals. Many organizations start between 3 and 5 percent, with escalation of 1 percent each successive year until a deferral percentage of 10 percent is achieved.
A recent employer we worked with elected to have an initial deferral percentage of 1 percent of eligible compensation. For an employee making $48,000 annually, this equates to a per pay period deduction of $20, with an annual deferral of $480 — hardly an amount of any significance in terms of being retirement-ready, especially when small balances such as this are often overly-burdened with account maintenance fees.
How we can help
You want to smoothly transition your organization and employees into automatic enrollment — but it’s difficult to know where to begin. You don’t have to do it alone. CliftonLarsonAllen (CLA) knows employee benefit plans. We can help you determine whether automatic enrollment is a good fit for your retirement plan. And if you choose to implement the feature, we can guide you through best practices for your unique human resources and payroll processes, payroll system, and organizational practices.