Automatic 401(k) Plans

What Your Employees Need to Know

If you haven’t yet hopped on the automatic 401(k) bandwagon, chances are you soon will. Analysts predict that automatic 401(k) plans will be the norm within the next few years.

If you are getting ready to set up an automatic 401(k) plan, you have the Pension Protection Act of 2006 (PPA) and our resources to guide you. This specific resource covers the notification rules that the PPA established for automatic 401(k) plans.

Employers Take Note

Employers must give each eligible employee written notice of their rights and obligations under the automatic 401(k) arrangement and explain their right to opt-out of the plan or change the default contribution amount.¹ For most 401(k) plans, the notice also has to identify how the default contributions will be invested if the employee doesn’t make an explicit choice.

Employers generally need to provide initial notice to an employee at least 30 days before the employee first becomes eligible or at least 30 days before the first investment in a qualified default investment. Notice must also be given annually thereafter within a reasonable period of time of at least 30 days before the beginning of the plan year. However, the 30-day lead time isn’t required for the initial notice if the automatically enrolled employees get a 90-day window to opt-out and get their contributions back tax penalty-free.

Under the regulations, plan sponsors have to notify participants before contributions go into the default investment, and again before the start of each plan year.

Automatic 401(k) plan sponsors have been afforded a measure of fiduciary relief related to their selection of default investments. Among the conditions the eligible employer must meet is a notice to employees related specifically to the default investment. It needs to explain or describe:

• The circumstances under which elective contributions will automatically be made, the percentage of pay, and the participant’s right to opt-out or choose to contribute at a different percentage;
  
  
• the participant’s right to direct the investment of assets in his or her account;
  
  
• the circumstances under which a participant’s contributions will be invested in the default investment;
  
  
• the investment itself, including investment objectives, risk and return characteristics, and fees and expenses;
  
  
• how a participant can move investments out of the default investment, including any applicable restrictions, fees, or expenses that apply in connection with such a transfer; and,
  
  
• where participants can get investment information about the plan’s other investment options.

The notice must be a separate written communication—not simply part of the plan’s Summary Plan Description or Summary of Material Modifications. It also needs to be easy to read and understand.

Join the Trend

The popularity of automatic features in 401(k) plans continues to grow. The PPA gives plan sponsors plenty of reasons to move forward. The Department of Labor projects that automatic 401(k) plans may cover 50 percent to 65 percent of the 401(k)-eligible population in the near future.² These employees will be put on a better path to a financially secure retirement. Will your employees be among them?

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¹ Plan Sponsors can be liable for civil penalties for failure to provide the notice in a timely fashion. [See ERISA section 502(c)(4), 514(e)(3).].

² See page 60470 in Federal Register Volume 72, No. 205, October 24, 2007.