Negative Election - Automatic Enrollment

[Guest Ted Kowalchuk, CFP, CFS,]

At what time(s) can the Negative Election - Automatic Enrollment be introduced to a 401(k) plan? I have a client that is a service company with participants scattered throughout the country on jobsites. We're trying to overcome consistently failing ADP tests.

[RCK]

I can't provide a cite, but can say that we originally implemented automatic enrollment in 1999, and did it mid-plan year. And we have made many changes mid year.

The big question is whether you want to make it prospective or retrospective. If you only do it prospectively, you have to decide whether to do it for hires after the effective date, or for those who become eligible after the effective date. This approach is manageable and not too expensive, but has minimal ADP/ACP impact for a few years.

The alternative is to make it retroactive, and to sweep everyone in. This give you much more potential impact on your ADP/ACP.

Be sure to factor inertia into your projections. So if you're getting 50% to enroll now, but they're averaging 6%, you're getting an average of 3%. But if you autoenroll at 3%, get 90% and they do not change upward later, you're now at 2.7%, and you have a bigger ADP/ACP problem instead of a smaller one.

[stephen]

Could you do a retroactive automatic enrollment for 3% if the participant is not already deferring at least 3%. Thereby leaving those deferring at more than 3% at their current level?

[WDIK]

I don't feel comfortable using the term retroactive with respect to salary deferrals whether they are based on either positive or negative elections.

[stephen]

perhaps I worded it poorly-

EX:

Effective 7/1/2006 everyone who is eligible in the 401(k) plan who is not already deferring at least 3% will be set to 3% contribution rate. Thereby, leaving those deferring at more than 3% at their current level and including all participants.

Or perhaps this is something that can only be done for newly eligble participants?

[Dan]

I think you can use automatic enrollment either for new employees only or for new employees and all who have previously made no election.

[Guest msladky]

What method of contributions (i.e., pre-tax or Roth) should be utilized?

[Guest kodle]

Dan, why do you think that you cannot increase current deferral percentages up to 3% for those contributing less than 3% under an automatic enrollment feature? I cannot find any authority that prohibits this. Thanks.

[Guest Pensions in Paradise]

I don't believe there is anything which prohibits it. But my argument would be because those participants deferring less than 3% have already made an affirmative and valid election as to the amount they want deferred. I don't see how forcing an employee to complete a new election form will help with employee morale. Those employees currently deferring less than 3% decided, for whatever reason, and whether it's right or wrong, on the amount they wanted to defer. Now the company comes along and says "we think you should be deferring 3% instead of your current 2%, so if you don't fill out a new form every two days we're going to automatically increase your deferral percentage whether you like it or not."

As you can tell, I am not a believer of automatic enrollment. You never hear of companies doing it for the benefit of the employees, it's usually because the company is having problems passing ADP so they use it as a tool to manipulate their testing results.

[RCK]

I agree wholeheartedly with the first paragraph of Pensions in Paradise response: you can autoenroll current participants to a higher level, but it does not seem right.

I disagree with the second paragraph. We (Fortune 100 company) were an early adopter of autoenrollment (June 1999), and our primary concern was always encouraging participants to get involved in planning their retirement, and for them to stop "leaving money on the table".

Because of the inertia that has emerged for autoenrollees, the process does NOT have a major ADP/ACP impact. Before autoenrollment, we had 70% participation at 5% (for 3.5%). Now we have 95% at 3% (or 2.85%). We lost ground.

OK, in reality, its not that simple. we are getting a material number of contributors up to the 5% match level, so we have a slight gain in the ADP test.