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Automatic Enrollment Is The Key To Higher Participation Rates

If you’re struggling with 401(k) participation rates, then you’ll be happy to hear that there is a very simple solution – automatic enrollment.

A research study done by Investment Company Institute found that on average, employers who automatically enrolled their employees had a 92% participation rate. Employers that didn’t automatically enroll their employees had an average participation rate of 61%. 

Employees Save More

 It’s a no-brainer that auto-enrolled employees save more over time. When you choose to auto-enroll your employees, you are not only increasing participation rates, but you’re also helping them save more over time.

This rings true especially for younger employees who tend to be less likely to enroll in employer retirement plans. By auto-enrolling them, you give them the opportunity to save for a longer period of time than they otherwise would have. If they’re on the fence about it for financial reasons, have them start small and encourage them to increase contributions over time.

Tax Advantages

Employees aren’t the only ones who benefit from automatic enrollment. Thanks to the SECURE Act, as a small business, you can earn a $500 tax credit per year for three years simply by adding an auto-enrollment feature to your 401(k) plan.

You may also be able to benefit from tax deductions if you choose to match employee contributions. Although automatic enrollment may increase your matching contributions, the matching contributions you make could possibly be qualified as an ordinary business expense, and in turn, your contributions would be tax-deductible. (At Saveday, we encourage you to always check with your CPA or tax advisor when it comes to tax planning.)

Establishing An Automatic Enrollment Plan

 When you choose to add an automatic enrollment feature to your 401(k) plan, you have 3 options to choose from:

Basic automatic enrollment 401(k) plan: Employees are automatically enrolled in the plan unless they choose to opt-out prior to enrolling. The plan must state the contribution rate, and the employee can choose a different rate if they wish.

Eligible automatic contribution arrangement (EACA): Similar to the basic automatic enrollment plan, but employees can request a refund of their contributions within the first 90 days of their first contribution.

Qualified automatic contribution arrangement (QACA): This enrollment plan has to meet certain requirements, such as employer contributions and a special vesting schedule. It does, however, automatically pass certain kinds of annual required testing.

It’s important to decide which type of auto-enrollment plan is best for you and more importantly should be determined before adopting a plan document.