Automatic Enrollment/Negative Election

[Guest Robin.Wolf]

We have a client in a high-turnover/low wage industry who is considering adopting an automatic enrollment provision for their 401(k) plan. Current eligibility is age 21 and 30 days service, with entry at the beginning of the month coincident with or next following satisfaction of the eligibility requirements. One problem we identified is the difficulty of providing "reasonable" and "effective" notice of the opportunity to make an election, considering that the service requirement for eligibility is so short. Does anyone see a problem with a provision maintaining the current eligibility requirements, but providing that the automatic salary deferrals will begin at a later date, such as the first of the quarter coinciding with or next following the date of particiation date? (Example: DOH 1/15, entry 3/1, automatic deferrals begin 4/1). I realize that in some cases entry and automatic deferrals would happen on the same date.

Thoughts are appreciated.

[WDIK]

One problem we identified is the difficulty of providing "reasonable" and "effective" notice of the opportunity to make an election, considering that the service requirement for eligibility is so short.

What period of time do you think is reasonable?

The minimum number of days between date of hire and plan entry under the current eligibility rules will be 30 days. If notice is given on the hire date, everyone will have at least 30 days to elect otherwise. Since a safe-harbor notice that is issued within 30 days of the beginning of the plan year is considered reasonable, your current eligibility scenario doesn't bother me.

[Guest renhark]

Have you considered amending the Plan to provide (on a prospective basis only) a year of service for eligibility?

[Guest Robin.Wolf]

Yes, but client prefers to offer deferral opportunity to as many employees as possible, even at the cost of administrative hassle.

[Guest trumpy]

Robin -

Is the primary rationale for having an automatic election to help support the ADP test? If so, would testing the Otherwise Excludable employees separately help? You may already test this way or considered - so I apologize if that has already been considered.

Trumpy

[JDuns]

You may also want to consider applying the default rate of deferral to non-participating employees at a later date. For example, make the default election effective (a) upon match eligibility if the plan allows unmatched contributions at day 1 and matches at a later date or (b) upon the entry date following 1 YOS and age 21 (as described by Tippy, this may help your testing results).

Generally, you want to tie the default deferral election to a future point that will make sense to the employee, satisfy internal HR policy goals, help testing and provide sufficient opportunity/incentive for positive action by the employee.

[RCK]

We've been doing automatic enrollment for 6 years, and have not had any problems. Here's how it works: Eligibility is age 21 and 90 days of service (with an hours requirement in those 90 days). When eligibility is reached, a packet is sent out. If they want to opt in, they can do so immediately. If they want to opt out, they have 45 days to do so. If they don't do anything in those 45 days, they are auto enrolled.

I don't see why you can't do that, changing the periods as you see appropriate.

I think the bigger questions right now are what the default contribution rate is and what the default investment election is. Should the rate be 2% so as to be painless, or 5% where your match caps out, or X% where it accumulates to something significant. Should the investment default be a stable value fund, an index fund, or a lifestyle fund?