401k Auto-Enrollment Pitfalls to Avoid
401k Auto-enrollment can help to boost 401k plan participation; however plan sponsors need to be aware of potential pitfalls that can create problems for plan sponsor sponsors After a Plan Sponsor University (TPSU) Program at Stanford University in Stanford, CA, Adjunct Lecturer Mark Laughton met with ERISA Attorney Claire Rowland to discuss some of the pitfalls that can occur when plan sponsors fail to administer the plan according to the provisions of the plan. Ms. Rowland discusses the options available to a plan sponsor if a mistake identified in the 401k plan auto-enrollment process.
Full Transcript Details
Hi. Mark Laughton here with Quintas. And today we’re here at a TPSU program at Stanford.
Today I have Claire Rowland here with me and Claire’s a practicing ERISA attorney who actually used to be an administrator for us as a TPA years ago.
Claire, today I wanted to ask you a few questions that you happened to mention in the panel about pitfalls regarding auto-enrollment. Can you tell me a little bit about that?
Sure, Mark, although first I’d like to say that automatic enrollment, in general, is a great and effective tool to increase participation rates in retirement plans and help employees save for their retirement.
Having said that, there are two things, in particular, that plan sponsor should watch out for. Number one is making sure that they actually catch everyone who is supposed to be automatically enrolled and enroll them in accordance with the terms of their plan.
The downside, if you miss someone who’s supposed to be automatically enrolled is, you may have to make a corrective contribution. Another issue with automatic enrollment is the automatic increases, also an effective way to increase the savings rate, but if those don’t get implemented on time, in accordance with the terms of the plan, that’s also another area that could end up being costly, if it’s found on an audit, when make-up contributions are required.
The good news is that both the IRS and the Department of Labor have voluntary correction programs and procedures in place. So, this is something that, if you catch it after the fact, you can implement a fix. But far better would be to have a procedure in place in the first place, so you could catch it as you’re going along.
Absolutely. That’s great. Claire, if you could elaborate a little bit, what is the time period in order to make that correction?
Well, ideally, you’d want to correct it as soon as possible. There are a variety of time periods that apply and the least costly method of correcting is usually within 45 days after you discover the error.
With respect to implementing automatic enrollment and auto-escalation, if an employer does miss that time period and does not auto-increase or auto-escalate the contribution, tell me a little bit about the correction program.
Well, from the point that it’s discovered, it’s a relatively short time frame to implement the correction. But the Department of Labor and the IRS very much want to encourage automatic enrollment and automatic increases of the automatic enrollment and so plan sponsors should definitely check with their administrator to determine what correction methods are available to them.
Great. And that’s Mark Laughton from Stanford TPSU. Thank you for watching 401k TV.
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