Auto enrollment and auto escalation features have been introduced to 401(k) plans to help increase plan participation, increase deferral rates, and help plans pass discrimination testing. However, there are a few problems of implementing auto features within the plan that require plan sponsors to be vigilant.
- Plan sponsors who fail to start the auto deferral or auto escalation at the appropriate time may create a missed deferral opportunity for participants which would require plan sponsors to make a qualified nonelective contribution.
- Participants who were auto enrolled would not have a designated beneficiary. Failure to follow up with these participants may lead to frustration for plan sponsors years down the road as many of those participants affected by auto enrollment policies won’t be retiring for years to come. Finding the appropriate beneficiaries, potentially years later, may be complicated by participant termination, changes in address, and changes in marital status.
Do you have policies in place to address the potential problems created by auto enrollment and auto escalation?