A recent study by Employee Fiduciary examined the negative aspects of automatic employee enrollment in 401(k) plans, particularly for smaller plans. Only 8.7% of small business plans (average of 25 participants with assets of $1M) automatically enroll eligible employees as opposed to 68% of larger plans. Why the contrast when automatic enrollment is traditionally seen as an excellent tool for retirement savings? Well, most small 401(k) plans tend to be safe harbor plans. This type of plan tends to have higher employee participation because due to high employer contributions. So, if your plan is a safe harbor plan, do you really need the automatic enrollment feature? Maybe not.
This feature adds major administrative responsibilities – including distributing a notice that describes the auto enrollment feature and enrolling participants that haven’t elected to enroll themselves. For a larger company, that may not be a huge issue. However, if mistakes are made, correction require significant effort and may be costly to fix.
With this, it may be a good time to re-examine your plan. If you already have excellent employee participation, consider removing the automatic enrollment feature. The potential for administrative issues & expensive costs for correct means that the costs may outweigh the benefits.