Automatic 401(k)s are emerging as the best solution for maximizing enrollment and helping employees effectively save for their future.
- Employees are automatically enrolled at a pre-set contribution rate
- Employees are automatically enrolled into a pre-selected investment fund
Most companies have 401(k)s to help employees save and invest for a financially secure retirement. But low rates of participation and savings, combined with poor investment decisions, suggest that many employees don’t optimize their 401(k). Not only can this harm their chances for a secure retirement, but your traditional plan can also fail or under-perform on nondiscrimination testing, resulting in the return of excess contributions to higher paid employees or restrictions on the amount they can contribute.
However, there is a highly effective solution: the “automatic 401(k)” is sweeping the defined contribution landscape. For employees, participation in these plans is automatic at a pre-set contribution rate into a pre-selected investment fund, unless they opt-out. Also, many plans automatically increase the contribution rate over time, known as "automatic escalation."
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. Benefits experts predict automatic plan design will soon be the norm.1
Why the success? Automatic 401(k)s remove impediments that often stand in the way of employee participation—from the “analysis paralysis” over investment decisions, to simply getting sidetracked and not taking action to sign up and start saving.
The time is right to move toward a simpler and better 401(k)—one that helps your employees make the most of their ability to save for the future.
Wondering about fiduciary standards related to an automatic plan? See Fiduciary Rules Related to Automatic 401(k)s
Automatic Plan Designs: Taking it up a Notch. Plan Sponsor Magazine, April 2007.