What is 401k Automatic Enrollment?

By Stuart Robertson

When a company sets up a 401(k) plan, it has the option to enable 401k automatic enrollment, also known as autoenrollment. This does what you might guess – it automatically enrolls every eligible employee at the company into the 401(k) plan at a set salary deferral percentage. All employees are put into a default, diversified portfolio of investments. This is typically a model portfolio or target date fund. No worries, employees are not locked in, they may opt out of the 401(k) at any time.

Why 401k Autoenrollment Is Awesome

Autoenrollment sounds kind of cool, but what’s the big deal you may ask? The big deal is that autoenrollment has greatly increased the number of employees participating in 401(k)s, and therefore, more Americans are saving for retirement. While many plans may reach participation rates of 60-75% without auto-enrollment, with it, it’s common to achieve over 90% participation.

Many employees that would not have enrolled in their 401(k) felt unsure about selecting investments. Now, with autoenrollment, it makes it easy for these employees to get started and to begin to realize the benefits that saving each payroll brings. That’s a pretty powerful way to change someone’s financial future for the better.

Autoenrollment Best Practices to Know

There are two key items to consider, so autoenrollment works for both you and your employees:

  1. Set the salary deferral amount at a level that will put your employees in position to have a meaningful amount saved come retirement age. Most experts indicate a person will need to save 10%-15%^ of their earnings over a career to retire at their current standard of living. It used to be common to set autoenrollment at 3% which is much too low. Think about setting the default salary deferral at 7%+. If your company provides say a 3% match, your employees are now saving 10% of earnings. If your company doesn’t match, you might want to set it a bit higher. Remember, your employees can login anytime and change investments, how much they are contributing, or can fully opt out. You’re just trying to get them started off on the road to financial independence the best you can.
  2. Update your 401k system with new employees that become eligible each month, or as it happens. Some payroll / 401k integrations may do this automatically for you. Regardless, it’s easy to do in your 401k plan sponsor site if you don’t have an integration. Just know that keeping your systems up to date prevents needing to do any corrective action later.

Another great benefit of autoenrollment is that it can help high earners at your company take full advantage of contribution limits if your plan is not a Safe Harbor 401k plan design (Safe Harbor plans enable full employee contribution limit options for everyone).

So that’s the scoop. It’s that simple to help more of your employees get on the road to financial freedom, and for your 401k benefits to make a difference for your company and your people’s lives.

^Industry experts generally agree that, depending on when you begin contributing, a minimum contribution of 10-15%, will be necessary to reach a goal of 8 to 10 times your ending annual salary prior to retirement. You may want to review your current contribution level to determine whether you believe it is sufficient to meet your retirement goals. There is no guarantee that contributions at this level will result in sufficient funds to meet those goals.

Meet the Author

Our low-cost 401k plans are easy to setup online and are supported by our 401k advisors and specialists. ShareBuilder 401k serves small business and medium-sized companies, as well as the self-employed. We offer Roth 401k, Safe Harbor 401k, Traditional 401k, and Solo 401k options. Your 401k plan is paired with investment management expertise and employee education to help you save more.