Auto Enrollment not Right for All 401k and 403b Plans
While auto enrollment has been a revelation for many 401k and 403b plan sponsors dramatically increasing participation rates and growing quickly, it’s not right for all plans and in all situation. At a TPSU program held at the Universities at Shady Grove in Maryland, an attending HR consultant describes a situation where auto enrollment did not work.
One of the benefits of auto enrollment other than increased participation is the automation of enrollment which, when done manually, can be time consuming fraught with error. But auto enrolment in 401k or 403b plans that do not have payroll integration with their record keeper can cause errors and more work. In the situation described by the attending HR consultant, the lack of integration forced the company to manually enroll new employees which resulted in late enrollments and corrections.
There are other issues with auto enrollment if not implemented correctly. At a high level, because employees do not have to act, it can lead to lack of engagement in the planning for retirement. At a practical level, deferral at too low a rate like 3% that is not escalated can lead participants into the false belief that they are on track for a successful retirement. It can also make the plan unattractive to record keepers who get paid on assets but whose cost is based on the number of participants – low account balances can result in low profit for providers and less service for plan sponsors
So what are the various types of payroll integration? 180 degree payroll integration includes automatic feeds from the payroll vendor to the organization’s record keeper – best practices extolled by a plan sponsor attending a TPSU program allow HR to review records looking for obvious errors rather than manual input. 360 degree integration allows changes from the record keeping system like increased deferrals to be automatically communicated to the payroll vendor.
Auto enrollment when part of the Ideal plan which includes auto escalation and a stretch match is great for most 401k and 403b plans but not all and not unless it means less work for busy HR and finance professionals.
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