Negative Elections ~ specified amount automatically contributed!

[Guest Philip Simpkins]

Have a plan sponsor with high percentage of employees making below $25,000. They currently match up to 6% of compensation. They want to specify 6% of compensation as the amount that will be automatically contributed.

Would appreciate any direction on 6%. We are comfortable with 3%. Has anybody been through any audits, etc. with the higher percentages?

[E as in ERISA]

I don't recall that there is anything from the IRS indicating that the rate of automatice contribution was an issue.

I would anticipate that it would be an employee relations issue, not a regulatory issue.

[Kirk Maldonado]

If they don't want to contribute that much, they opt out. If they are too lazy to opt out, they don't have a good reason to complain.

Where's the problem?

[E as in ERISA]

Employees still complain even if they don't have good reason to do so!

[Kirk Maldonado]

In this job market, complaining about things without justification is not a good idea. That's a great way to be one of the first persons that is laid off.

[RCK]

Our core plan has had automatic enrollment for just over three years, with a 2% default contribution rate. Our experience is that we get very few complaints, and it really has not been a problem.

I think that defaulting up to your matching level is a defensible approach. I would be a little concerned about the vesting schedule, but most of all I would do some retirement modeling to show that 6% would get the typical participant into reasonable replacement ratios at retirement.

The experience of most plans with auto enrollment is that there is tremendous inertia, both in deferral percentage as well as investment elections. It seems that participants are implicitly assuming that the percentage that the sponsor has selected is adequate to fund their retirment. I see that as a future litigation prospect.

RCK

[david rigby]

Automatic elections can be an additional expense to the plan. If the workforce is very transitory, then the high turnover will mean that the plan is faced with making many distributions of small amounts. Consider the implications of locating these individuals, doing withholding or rollovers, producing a 1099R at the end of the year, possibly with another address change.

If the above issues are not a problem, it seems that the automatic election should be targeted to the level that is likely to help you pass the ADP test. More than that seems pretty aggressive, some might even use the term "controlling."

[Guest Gordy]

Over a year ago the State of California (Yeah, I know) issued an adverse opinion on automatic deferrals. Is anyone aware of a change in position? Can it be done it California?

[Guest FREE401k]

We are a TPA and we use auto-enrollment for all our Plans, and have for about five years now. We advise clients that it is their fiduciary duty to set the default contribution limit at a limit that is in the participant's best interest, and that the minimum contribution limit they should use is the limit that captures the maximum match (did I say that right?). Example: if the Plan Sponsor matches up to the first 4% of pay, we recommend setting the auto enroll default contribution to at least 4%. Most clients follow our recommendation and it works beautifully. As an earlier post mentioned, any employee who wants a lower con just chooses one.

[Guest rmeigs]

FREE401k -- I think this is a great approach. More employers need to be concerned about the retirement income short-fall of the average employee. The use of auto-enrollment that captures the maximum match is one good way to do so.

If the funds are only going to, lets say, a money market fund, it defeats part of the objective. How do you handle the default fund option?

[Guest FREE401k]

We use the same "best interest of the participant" logic when choosing the fund into which the Plan auto enrolls. All of our 401(k) Plans offer a "Professionally Directed Investment" option (http://www.dallasnews.com/business/scottburns/columns/archives/1999/990221SU.htm) and our Plan Sponsors auto enroll into that option. For Plans that do not have a similar option we would have the Plan Sponsor auto enroll into some kind of low-cost, broad market index fund.