Recent legislation now requires that automatic enrollment be part of most new 401(k) and 403(b) Plans. But making it work requires coordination.
That coordination starts with understanding how the process works.
How Automatic Enrollment Works
Automatic enrollment has been part of retirement Plan design for many years as a way to encourage more employees to save for retirement. Instead of requiring an eligible employee to make an affirmative election to contribute, the employee is automatically enrolled unless he or she elects otherwise
The specific requirements, including applicable exceptions, depend on the Plan.
Contribution Rates
The initial contribution rate must be at least 3% but not more than 10% of compensation. The Plan determines the initial rate within that range.
Automatic enrollment can also include automatic escalation if provided for in the Plan. The employee’s contribution rate generally increases by one percentage point each year until it reaches the percentage established by the Plan within the permitted range.
The employee remains in control. An automatically enrolled employee can elect a different contribution rate or opt out of the Plan.
Follow The Process
Automatic enrollment isn’t a one-time enrollment event. It is an ongoing process involving eligibility, employee elections, payroll deductions, transmitting funds to the recordkeeper, confirmations, and annual increases.
This process requires coordination and communication among the employer and its service providers: the TPA, the financial advisor, and the recordkeeper. Each party has to understand its role, what information it needs, where that information comes from, and what happens next.
Fund Accounting Adds Another Layer
For many non-profit employers, fund accounting adds another dimension. Payroll may be allocated among different programs, departments, grants or funding sources, and an employee may be paid from several sources during the same payroll period.
Making Automatic Enrollment Work
The key to making it an efficient and accurate process is establishing that process before automatic enrollment begins. Here are some basic questions that need to be answered.
- Who determines when an employee becomes eligible?
- How does that information get to payroll?
- Who initiates the transfer of funds?
- How does the recordkeeper know how to allocate them?
- And who confirms that the transaction was completed correctly?
Mistakes Can Happen
Automatic enrollment is a transaction-intensive process involving multiple systems and service providers. Even with the best procedures, mistakes can and do happen.
The IRS recognizes that retirement Plan operational errors occur and has established procedures for correcting them which include automatic enrollment mistakes.
But correction, of course, begins with identifying the error. This means that regular confirmation and reconciliation, if necessary, must be an essential part of the end-to-end process.
Technology can drive the automatic enrollment process, but effective oversight remains a human job.
Photo: David Trinks on Unsplash