Retirement Made Simpler: Helping you automate your 401(k) step-by-step
About Auto 401(k) Benefits Getting Started Succes Stories Resources & research Support/FAQs Who we are
Need more information about how to automate your 401(k)? Want to know why it’s a win-win for employees and employers? Here are answers to many of your automatic 401(k) questions.

If you have further questions or need more information, please contact us.

About Retirement Made Simpler Implications of an Automatic 401(k) Plan
About Automatic 401(k)s Pension Protection Act of 2006
Starting an automatic 401(k)  

About Retirement Made Simpler

Q1 What is Retirement Made Simpler (RMS)?
Q2 Which organizations have formed RMS? Why have they come together?
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A1 Retirement Made Simpler is a coalition of respected advocacy, regulatory, and policy organizations, including AARP, the Financial Industry Regulatory Authority (FINRA), and the Retirement Security Project (RSP), launched to encourage employers to help their employees be better prepared financially for retirement. The campaign was created specifically to provide companies with the tools and information they need to automate their 401(k) plans, with the goal of encouraging more Americans to save for a secure retirement.

The campaign has developed tools and information to educate companies about automatic 401(k)s, why they work, best practices on how to implement them, and real- world experience from other companies that already have made the switch. Using this Web site, the Toolkit, and ongoing outreach in targeted states, we give employers answers to their automatic 401(k) questions.

Saving for retirement is one of the most important things employees can do. Learn more about how you can help.

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A2 AARP, the Financial Industry Regulatory Authority (FINRA), and the Retirement Security Project (RSP) have come together because we know that Americans are not saving enough for retirement—and we can help. By combining our unique resources and our expertise, we are able to provide valuable tools that assist employers and their employees in saving more effectively.

We have devoted our resources to this campaign because we know that automatic 401(k)s work. Companies that use them commonly see participation rates soar to between 85 and 95 percent especially among workers with the lowest participation rates. Even better, it's easy for companies to automate their 401(k)s. With traditional 401(k)s, many employees fail to start saving because they don’t know how to allocate their investments or understand their choices. Saving for retirement seems so daunting that many people procrastinate or avoid thinking about it. But the inertia that keeps people out of traditional 401(k)s is used, in automatic 401(k)s, to help them save. When an employer takes the initiative to automate enrollment and set default investment options and savings levels, employees benefit. Employees start saving earlier, save more over time, and feel good about themselves and their company.

We are focusing our combined knowledge and resources on automatic 401(k)s because they are a simple and effective way to enhance retirement savings.

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About Automatic 401(k)s

Q1 What is an automatic 401(k)?
Q2 How is an automatic 401(k) different from a defined benefit plan and traditional 401(k) plan?
Q3 Do automatic 401(k)s work?
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A1 It is a type of employer-sponsored defined contribution retirement plan in which an employee is automatically enrolled instead of having to sign up to participate. By taking the burden off of the employee, an automatic 401(k) greatly increases the odds of participation and can help an employee save more and save earlier in life.

Companies offering automatic 401(k)s do so by selecting a default investment (the standard fund in which all employees would automatically be invested) and a default savings rate (a standard amount that could increase gradually over time). Employees are automatically enrolled in the plan, though they can opt-out if they choose to do so. Employees also can increase or reduce their savings rate or change their investment mix at any point. Studies show that when companies automate their 401(k) plans, participation rates can increase dramatically.

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A2 If a company has a defined benefit plan, it provides a specific level of income for employees as a lifetime annuity or a lump sum. The amount of money employees get from a defined benefit plan typically varies depending on the plan’s benefit formula and the employee’s tenure with the company, age of retirement, and career average or final salary. Defined benefit plans, once very common, are increasingly being replaced by defined contribution plans.

A defined contribution plan also is an employer-sponsored retirement plan, but the income the plan provides is not predetermined or guaranteed, as it is with a defined benefit program. Rather, it varies according to how much the employee and employer contribute to the plan, how the contributions are invested, and the return on those investments. 401(k), 403(b), 457, and profit-sharing plans are examples of defined contribution plans.

An automatic 401(k) is a defined contribution plan, but it differs slightly from the traditional 401(k) plan in that employees automatically are signed up to participate at a predetermined savings rate, and in a predetermined investment. However, if an employee wants to change his/her savings rate or investment portfolio, or opt-out completely, he/she can do so without penalty. Automatic 401(k)s have been shown to increase the number of employees saving for retirement, help companies pass nondiscrimination testing, and increase employee satisfaction.

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A3 Yes, they do. It’s been well-documented that when workers are faced with overly complicated financial decisions, the tendency is to avoid making the necessary financial decisions required by a traditional 401(k). This dramatically increases the risk that they will be financially unprepared for retirement. The automatic 401(k) is a simple tool that takes the complexity out of saving for both employees and employers.

Automatic enrollment in a 401(k) has been shown to increase participation rates of newly hired employees dramatically, particularly among women, minorities, and low-income earners. When also applied to existing employees who do not belong to the 401(k) plan, automatic enrollment can increase participation rates to as high as 90 to 95 percent of eligible employees in an average plan.

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Starting an Automatic 401(k)

Q1 What is the process for enrolling employees in an automatic 401(k)s?
Q2 What financial education should I provide along with an automatic 401(k) program?
Q3 How much of my time is likely to be spent managing automatic 401(k)s compared to those that are opt-in?
Q4 Do automatic 401(k)s cost more to manage than my company’s current retirement program?
Q5 What if my employees can’t afford to participate in automatic 401(k) plans?
Q6 A lot of my employees are low-income. How does an automatic 401(k) help them?
Q7 What is the process for employees who choose to opt-out? And how long do they have to do so?
Q8 What happens to an employee’s money once they opt-out?
Q9 Can an employee who opts-out rejoin an automatic 401(k) later?
Q10 Why should my company consider automatic enrollment when our current participation rate isn’t low?
Q11 Are there ways to help employees understand the benefits of automatic 401(k)s?
Q12 How do I select default settings for my automatic 401(k) that will be most beneficial to my employees?
Q13 Where can I get information in support of automatic 401(k) adoption for my company?
Q14 What should I look for when selecting a service provider to help administer our company’s automatic 401(k) plan?
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A1 The first step is to let your employees know about automatic enrollment and how it will affect an individual employee. This is required by the Pension Protection Act of 2006 (PPA). The best way to do this is to develop an employee communications plan (check out our Toolkit for how-to’s). It will be important to tell your employees what an automatic 401(k) is, how it works, what the benefits will be to them, and what it could mean to their bottom line. You also need to communicate the specifics of your automatic 401(k): when it will take effect, who will be automatically enrolled, what percentage of their pay will be withheld for 401(k) contributions, and to which investment options contributions will be directed.

Additionally, you need to tell your employees that they have other investment options if they do not choose to stay in the pre-selected default investment. They also can choose their own contribution amount or opt-out altogether. For employees who decide they do not want to participate after they have been automatically enrolled the PPA gives you the option of allowing them to get their contributions back without tax penalty, as long as they do so within 90 days of their enrollment.

You should work with your plan provider to determine the best way to enroll employees in your automated plan.

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A2 While automatic 401(k) plans can help solve participation challenges, they cannot solve every retirement security challenge. Additional financial education can be invaluable in making sure your employees are fully prepared for retirement. Visit our Investor Education section to find tips and tools (such as savings calculators) for your employees. Providing financial education also could help reduce your company’s exposure to fiduciary liability, and helps address the lack of financial literacy among many employees. One additional benefit of an automatic 401(k) program is that you can focus your efforts on increasing employee knowledge about the plan and core investment concepts, rather than on participation drives.

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A3 Anecdotal evidence indicates that managing an automatic 401(k) takes no more time than managing a traditional 401(k). And, all of the time and resources you might have previously used to increase participation rates can be spent on other projects.

Many companies find that, over the long term, they actually save time with an automatic 401(k) plan. Work with your provider to determine an automatic 401(k) plan that is best for your company and employees. In addition, the tools available here can help you easily manage the transition to an automatic 401(k). Click here to learn more from those who have successfully implemented an automatic 401(k).

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A4 It depends. Costs could increase to some degree because of additional employer matching contributions (as a result of growing participation) and perhaps the time needed to manage more small accounts. However, matching costs are typically predictable and manageable, and reflect the fact that automatic enrollment tends to increase participation levels. In addition, matching contributions for automatically enrolled employees may be smaller than average because these typically are lower-income employees.

Fundamentally, providing employees with good benefits doesn’t have to hurt the bottom line—in fact, it can increase employee satisfaction and help with employee retention.

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A5 Conventional wisdom says that low-income people tend to have greater difficulty saving for retirement. Research from the Retirement Security Project (a member of the Retirement Made Simpler coalition) indicates that low-income individuals can, and will, save given the right circumstances. These include a significant and readily understandable employer savings match; easily accessible savings vehicles (such as an automatic 401(k)); and the opportunity to use part of an income tax refund to save. Professional assistance provided by an employer also could generate a significant increase in retirement-saving participation, even among low-income households. Of course, those who simply cannot save without sacrificing present needs can always opt-out of the plan.

For employees who decide they do not want to participate after enrollment has begun, the Pension Protection Act of 2006 allows them to get all of their contributions back without tax penalty, as long as they do so within 90 days.

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A6 Automatic enrollment has been shown to raise 401(k) participation rates dramatically when it is applied to new hires, particularly new hires who are low earners. In one important study, automatic enrollment increased 401(k) participation rates of those making under $20,000 annually from 13 percent to 80 percent.

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A7 Employees who choose to opt-out need to review and sign a written notice provided to the employee, formalizing their decision. The Pension Protection Act of 2006 requires plan sponsors to provide written notice to all eligible employees about their rights and obligations under the automatic plan arrangement, which includes the right to opt-out of the plan as well as change the default contribution amount, and a description of the default investment and right to select alternative investment choices. Employees must have at least 30 days between receiving the notice and becoming eligible to contribute, or making the first contribution to opt-out, or choose a different contribution amount or investment fund. But the 30-day advance period does not apply if the plan permits automatically enrolled employees to revoke their enrollment and get their contributions back penalty-free.

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Employees get that money back without any penalties, as long as they opt-out within 90 days of enrollment.

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A9 Yes, employees who opted-out can decide to rejoin a company’s automatic 401(k).

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A10 It is important because those not enrolled are the most vulnerable and are those for whom financial decisions are the most complex. If non-participation is intentional, they will opt-out; however, if the non-participation is due to procrastination, inertia, or indecision, automatic enrollment will help them save. Surveys show that nearly all employees who are automatically enrolled are glad this was done for them.

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A11 By law, you are required to inform employees about your plan and its specifics. This includes information about when employees will be enrolled, the percentage automatically deducted from each paycheck, and the type of investment option to which the plan defaults.

In addition, you can, and should, provide individualized communication to your employees about the benefits of an automatic 401(k) and how it will help them save more effectively. This is no different than the targeted communications on company benefits and policies you already undertake. You can send a company-wide e-mail, develop a paycheck stuffer, send letters to employee residences, and offer seminars. These are just a few of the many communications tools at your disposal to help educate your workforce about retirement planning. Look here for tips and tools on communication with your employees about your automatic 401(k) plan.

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A12 Early on, many plan sponsors took a cautious approach to default settings, opting for low-risk alternatives geared to principal preservation (money market or stable value funds, for example). They were concerned about fiduciary liability—participant lawsuits over investment losses if, for example, the employer selected a default investment that involved stocks, and if the stock market declined.

Today, many sponsors are concerned about the risk to employee retirement security if an employee stays in a low-risk default fund for many years. The Department of Labor expressed similar concerns, and has issued regulations providing a measure of fiduciary comfort for three main types of Qualified Default Investment Alternatives (QDIAs)—lifecycle funds, balanced funds, and managed accounts. Surveys suggest that more than half of the automatic 401(k) sponsors are using a lifecycle fund or model portfolio, also known as a target date retirement fund, or a balanced fund or managed account as their default investment.

A lifecycle fund or model portfolio, also known as a target retirement date fund, is an investment mix that seeks both long-term appreciation (through equity investments, such as stock funds) and principal preservation (through fixed-income investments, such as money market funds), as well as risk management (through a diversified portfolio of stocks, bonds, money market funds, and even cash). Factors such as a participant’s age, expected retirement date, or life expectancy determine the investment mix. The mix becomes more conservative as the participant gets closer to retirement, usually by shifting assets from stocks to fixed-income investments, such as bonds.

A balanced fund or model portfolio is a similar diversified mix of equity and fixed income investments. A target level of risk for plan participants as a whole determines the investment mix. The mix is not required to vary with the age or other individual circumstances or preferences of particular participants.

Under a managed account, an investment manager provides investment management services under which it allocates the assets of a participant’s individual account. The goal is to achieve a mix of equity and fixed-income investments that seek both long-term appreciation and principal preservation. The manager uses investment alternatives available in the plan and adjusts the mix based on an individual’s age, target retirement date, or life expectancy. The mix becomes more conservative as the employee ages.

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A13 The Retirement Made Simpler Web site can help. Our Toolkit gives you practical advice and sample materials that will assist you in switching to an automatic 401(k). The success stories featured on the site provide a realistic look at implementing an automatic 401(k) and the impact on employers and employees. Our Resources & research section provides the latest research and expertise on automatic 401(k)s to help you better understand them and help you determine whether they are right for your company.

Other resources include the Profit Sharing/401(k) Council of America and the Employee Benefit Research Institute.

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A14 Confirm that your current service provider can effectively administer automatic features, or, if not, choose a service provider that can. Although automatic 401(k) plans, by design, are not difficult to administer, it is critical that your plan provider be well equipped to manage the changes and ongoing administration of your automatic 401(k) with little involvement from you.

The following link provides more information and key questions you should ask when interviewing potential plan providers: What to Look for in an Automatic 401(k) Plan Service Provider.

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Implications of an Automatic 401(k) Plan

Q1 How will automatic 401(k)s help me meet nondiscrimination standards?
Q2 Does automatic enrollment violate wage garnishment laws?
Q3 What type of fiduciary liability could automatic 401(k)s have for employers?
Q4 How many companies currently are participating in these types of plans?
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A1 The passage of the Pension Protection Act of 2006 helps companies use automatic 401(k)s to pass nondiscrimination testing in two ways.

  • First, by encouraging participation, especially among the company’s average and lower income employees, who are less likely to be currently contributing to a 401(k), automatic enrollment tends to improve nondiscrimination results. This enables executives and other higher-paid employees to contribute more.
  • Second, beginning in 2008, a plan will be exempt from nondiscrimination standards if a company implements an automatic 401(k) for new hires (and existing non-participating employees who did not explicitly opt-out) at 3 percent of pay (at least), escalating 1 percent per year up to at least 6 percent. Among other requirements, the plan also must offer specified employer matching contributions or make non-matching contributions that, in either case, vest after 2 years.

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A2 The Pension Protection Act of 2006 clarified that automatic 401(k) enrollment generally is permitted, even in states where wage laws generally require an employee’s written authorization for payroll deductions. The law also permits automatic deferral (or savings) rate increases.

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A3 For more information on this topic, see: Don’t Lose Sleep over Automatic Investments

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A4 In 2006, 41 percent of large 401(k) plans—those with 5,000 or more participants—used automatic enrollment, up from about 34 percent the year before and from close to zero ten years ago, according to the Profit Sharing/401(k) Council of America.

A 2007 Wells Fargo study shows that 66 percent of plan sponsors already automatically enroll or plan to automatically enroll new employees compared with 36 percent in 2006. Automatic escalation is on the rise, too. According to the survey, “Trends and Experiences in 401(k) Plans,” released October 29, 2007 by Hewitt Associates, nearly 30 percent of companies offer automatic escalation in conjunction with automatic enrollment, with more than 40 percent of those escalating employees to rates between 8 and 15 percent.

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Pension Protection Act of 2006

Q1 How does the Pension Protection Act of 2006 (PPA) affect my company’s 401(k)?
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A1 There are several ways this legislation affects your company’s 401(k). First, PPA exempts your company from nondiscrimination testing (the Actual Deferral Percentage (ADP) and the Actual Contribution Percentage (ACP) tests) when you have an automatic 401(k) plan in place that meets certain requirements.

The PPA also gives a measure of fiduciary protection for default investments that qualify as Qualified Default Investment Alternatives (QDIA), which, under the Department of Labor regulations, include managed accounts, lifecycle funds, and balanced funds. QDIAs also include capital preservation (such as stable value) funds for up to 120 days after the participant’s first elective contributions or to the extent the plan invested in those funds before December 24, 2007 (if funds meet certain requirements).

PPA also confirms that state wage or payroll laws do not preclude 401(k) automatic enrollment arrangements and allows a company to give automatically enrolled employees a 30-day opportunity to opt-out and get their contributions back penalty-free.

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