Why everyone should consider Automatic Enrollment

When automatic enrollment first started, it was called a negative election and it was propped up by a revenue ruling where an employer proposed adding it for the very first time.  When I first heard of it in 1999, I thought it was something out of the Soviet Union (yes, I was one of the last of the red baiters). The reason that I didn’t like it because I thought negative election was a gimmick to boost the deferral participation rate for non-highly compensated employees, so the employer could get better testing results.

It didn’t help those who didn’t negatively elect not to participate in the plan (there is a reason they use automatically enroll because negative election means that if you didn’t elect not to defer, you were deferring) is because there was no relief for the employer under ERISA 404(c), so pretty much money belonging to those affected were placed in money market accounts typically.

Fast forward 7 years and the government finally enacted what is now known as automatic enrollment into the Code with protection under ERISA 404(c). Thank you, qualified deferred investment alternative (QDIA), as well as automatic enrollment qualifying as a safe harbor 401(k) as a Qualified Automatic Contribution Arrangement (QACA).

So my view towards automatic enrollment changed because it gave a benefit to those who were automatically enrolled since their assets would be invested in something that over the long term would return better than money market.

Working for a producing third party administrator (TPA), I thought this was a great idea to push because we had assets under management and we administered plans where pricing was based on assets. Plans that added automatic enrollment would likely have more assets and since many of the folks who had the assets in the plan now would likely retire over the next 20 years (bye, bye, baby boomers), we may have a negative outflow of 401(k) assets because the younger workers don’t save. I see  automatic enrollment as one small step to helping a retirement crisis this country will face over the next 20-40 years.

The folks at the TPA thought otherwise, they saw automatic enrollment as a human resources disaster, mainly employees complaining after they were automatically enrolled and losing 3%+ of their paycheck to the 401(k) plan.  I think it’s a bigger h.r. disaster for employers to do nothing to help their employees save for retirement. Is automatic enrollment perfect for everyone? Absolutely not. Should every plan sponsor consider it? Yes.

If you are a plan sponsor, consider it as a way to do better for your employees to save for retirement. For a financial advisor and/or TPA, automatic enrollment may help your bottom line.

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