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Consider Automatically Enrolling Employees In Your 401(k) To Make Your Plan Less Burdensome

A 401(k) plan can be great for both employees and employers. As an employee, you get to stash away money in your retirement account that may be supplemented by matching contributions from your company. Your investments generally grow undisturbed by taxes until you make withdrawals during retirement.

For employers, funding a 401(k) plan normally costs less than a traditional pension or profit-sharing plan. It can also be an effective way to attract and retain valuable employees. So everyone wins.

But there’s a catch. Plans such as 401(k)s are subject to strict non-discrimination testing to make sure that highly compensated employees—HCEs, in tax lingo—aren’t reaping an unfairly large share of plan benefits. Fortunately, there’s a relatively simple solution. Your company can use an automatic-enrollment plan designed to encourage a higher level of participation. Rule changes mandated by the Pension Protection Act of 2006 make this easier.

Traditionally, employees have had to decide to join a 401(k) plan. With automatic enrollment, however, they’re in the plan unless they opt out.

The virtue of auto-enrollment is that most people, including lower-paid workers, tend not to opt out. Typically, 3% of each participating employee’s compensation may be directed into that worker’s plan. There are also default investment options, normally mutual funds, that will be used unless an employee chooses other investments. So a participant needn’t lift a finger to join the plan and get invested.

If you want to add this provision to your 401(k), a plan provider, third-party administrator, or consultant can help you revise your plan documents. Meanwhile, the Pension Protection Act, or PPA, makes it easier for employers to implement auto-enrollment. For example: