Automatic enrollment in 401(k) plans forces employees to opt out if they don’t want to participate, increasing retirement plan participation. A predetermined percentage is deducted from employees’ salaries, and employers must provide timely notice and a default investment option. The Qualified Default Investment Alternative (QDIA) provides legal protection for employers who choose a QDIA-compliant default investment.
Automatic enrollment is a feature of the 401(k) retirement plan that forces employees to opt out of the plan if they do not wish to participate. If an employee does not proactively opt out, they are automatically enrolled in the plan. This means that a percentage of the employee’s salary will be deducted as a contribution to the 401(k) plan. The percentage is known as the default auto-enrollment rate.
The purpose of automatic enrollment is to increase participation in retirement plans. Many industry experts and lawmakers fear that most Americans aren’t saving enough money for retirement. In response, plan provisions, such as automatic enrollment that increase retirement plan participation, are a key element of an overall strategy to avoid a future crisis. Legislation has also been enacted to target employee retirement plan participation.
The way automatic enrollment works is that an employer will adopt the automatic enrollment provision, also known as an automatic contribution agreement, into the company’s 401(k) plan. The provision specifies a predetermined percentage to be used for employees who do not opt out of the plan. A typical default percentage is 3%. Using that as an example, employees would have 3% of their salary deducted from their paychecks and deposited into the 401(k) plan on their behalf. The resulting benefit to the plan is increased participation, as many people will not take the necessary steps to disenroll.
A requirement of an automatic enrollment feature is that employees must receive timely notice of the need to opt out if they do not wish to be enrolled. The notice must be given at least 30 days prior to the date the employee is automatically enrolled. In addition, a subsequent annual notice must be given to all plan participants at least 30 days prior to the start of each plan year.
In addition, the plan must specify a default investment that automatically enrolling participants will set themselves if they do not select their own investments. Due to the potential liability of choosing a substandard investment option for participants, there is legislation that provides some protection to employers. The legislation is called the Qualified Default Investment Alternative (QDIA) and was enacted under the Pension Protection Act.
The QDIA allows employers to receive legal protection by choosing a default investment that meets the guidelines of the QDIA regulations. The main relief for employers is that they will not be held responsible for losses incurred due to market fluctuations.
Smart Asset.
Protect your devices with Threat Protection by NordVPN
