Automatic Enrollment

Automatic enrollment (also known as “automatic employee contribution”) is a procedure for encouraging worker participation in 401(k) retirement savings plans. As the name suggests, an employer that sponsors a plan and that chooses to use automatic enrollment enrolls its employees in the plan automatically, by salary reduction, without requiring them to take any initiative or action in order to participate.

• Unless an employee elects otherwise, the employee is presumed to be participating, and the employee’s take-home pay is reduced by a stated amount (such as 3%), which is contributed to the 401(k) plan.

• The contributions are “pretax” (excludable from income for income tax purposes), are invested in a manner designated by the plan (unless and until the employee chooses a different investment), and accumulate earnings that are not taxed until withdrawn from the plan.

• Although employees must be given adequate notice and opportunity to opt out of the plan, automatic enrollment creates a “positive presumption” in favor of saving.

Automatic enrollment is permitted and encouraged by the IRS as a means of increasing retirement paln participation, particularly among low and moderate income groups:

“Also, in an effort to encourage more workers to enroll in the 401(k)s that are already available to them, we have made it clear that employers can automatically enroll workers in the 401(k) plan unless the workers themselves choose to opt out . . . . It sounds like a small thing, but it’s one thing that can really affect a very large number of people in getting them into the business of saving for their own retirement.”

President Clinton, June 4, 1998

The government has released a guide for small businesses wanting to learn more about automatic 401k enrollment:

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