The 401(k) Audit CPA Success Show: Episode 11
In this episode, Jamie Nau sits down with Kim Moore, the Summit CPA audit director, to talk about auto-enrollment. Auto-enrollment is when you require your employees to enter the 401k plan once they meet certain requirements. They don’t have to do anything in order to be enrolled. It happens automatically unless they take steps to decline enrollment.
Listen to learn about how and why you would implement this into your company’s 401k plan.
Jamie Nau: Hello, and welcome to today's podcast. Today we have Jamie and Kim here from Summit CPA, and we are talking about a really good topic. I'm excited for this one. This is something that I've talked about with almost every company I've ever worked for, but also heard talked about among many HR professionals, and when I was in the audit world. So we're going to talk about auto enrollment. So Kim, want to expand a little bit on what the definition of auto enrollment is and exactly what it means for companies?
Kim Moore: Thanks, Jamie. Glad to be here, and welcome to all our listeners. I'm hoping this is a topic that will be of interest to folks, either if you've heard about auto enrollment, or maybe you haven't. And maybe it's something you're considering and you were just wondering, should I do that or not? Auto enrollment, and we are talking about 401(k) plan. So this is primarily geared to plan sponsors. So companies that offer a 401(k) plan to their employees auto enrollment is something you can implement for your 401(k) plan. Obviously there has to be a 401(k) plan in place, it has to be kind of up and running, or maybe you're considering this as your beginning your 401(k) plan as well. So it obviously doesn't stand alone. But auto enrollment is a function of the plan, which not only allows but actually requires employees to be auto enrolled or automatically enrolled in the 401(k) plan once they've met certain criteria. So in a normal 401(k) plan, you're going to specify eligibility requirements for an individual to be able to enter the plan. Usually it's age and/or service requirement. So you may say the person has to be 21 or older and they have to have worked for the company for say, six months before they can enter the plan. Auto enrollment doesn't change that. You can still specify any age or service that you want subject to. There's other requirements around that. But you could say as long as you over age 18, no service required. And then we allow you to enter the plan or as I mentioned, you can have an age service. So it doesn't really doesn't affect that. But once an employee hits those two requirements, whatever you specify, then they become automatically enrolled in the plan and they don't need to do anything to enroll. Once they hit the requirements, they become automatically enrolled. It's the reverse of how it normally works. Usually in a 401(k) plan, the employee has to say yes, I want to enroll. They either fill out a form or they go on line and they're affirmatively saying yes, I want to participate and here's the details. In this particular case, it's the reverse. So they're automatically enrolled unless they affirmatively say no, I do not want to participate. In that case, they have to, again, fill out a form or go online and decline enrollment. So it's kind of the reverse of the normal process. The other thing that's a little unique about auto enrollment, normally when an employee is enrolling in a 401(k) plan, they're going to specify, yes, I want to participate, I want to contribute a certain dollar amount each pay period or a certain percentage. So one $100 per pay period, or maybe it's 3% of my compensation I want deferred into the 401(k) plan and I'm going to pick out of the maybe 20 investment options that I have, I'm going to have you allocate that contribution amongst these 5 investments that I've selected. Again, all of that is subject to how your plan works. But they're picking their deferral amount and they're picking their investment selections in an auto enrollment plan. They can do the same thing. They can still select a deferral amount. They can still select their investment. But if they don't do that, so again, if they don't affirmatively go in and do that, they will be auto enrolled, usually at a percentage, and they will be put into one or more default investments, which are already selected. When you're electing this auto enrollment, the plan sponsor, the employer selects those and so they will be defaulted into those if they don't select anything. So if they do nothing, they're going to be auto enrolled at a certain percentage and into certain investments. They can change those later. But if there's nothing on file at the time that they're getting ready to auto enroll, then they will be defaulted.
Jamie Nau: Most companies like the most risky investments, right?
Both: Laughing [in audible]
Kim Moore: No, that would be a problem. Hopefully they don't even have those options in their plan. But what we see typically in auto enroll is usually something like 3%, that is pretty typical of what we see. Obviously you can say that however you want, but we see a typical 3% and then usually the investment is something like a stable value fund, some type of conservative, usually not a money market, but usually some kind of conservative fund or what's really popular. Now, a lot of funds have a target date retirement funds. So there are different funds targeted towards the anticipated retirement date for different people. So you'll see a retire, blah, blah, blah, retirement fund up to 20, 40, and then blah, blah, blah, 20, 50, 20, 60, equating to when folks are anticipating their retirement and then they'll be placed into the one closest to their anticipate retirement date.
Jamie Nau: So you can do that, like differ for every person, like it will be based on their age at 30 years or however long.
Kim Moore: Exactly, yeah. Actually your provider will do that for you. So if there is no investment election on file, they will take the birthdate, add so many years to it and then say it's appropriate to put you in this particular fund. Those are nice because those are a mix of actual investment sitting in those funds. So there's no, you know, I don't say there's no risk, but less risk than you would get with one particular fund.
Jamie Nau: So they obviously get less risky the older you get, the closer you get to retirement. So the 18 year old employee, there will be a lot more risk than the 55 year old employee.
Kim Moore: Yeah, exactly. And they're nice because what we're doing and we're going to talk about this here a little bit, pros and cons, but one of the things that we find is that folks may not get into a plan either because they're confused by it, or maybe they're a little scared as an employee. Maybe they're like, I have to pick investments? I don't know that much about investments. Maybe it's just best I leave it alone. I don't do it here. They don't you know, they don't really have to do anything. I mean, in that particular case, they're going to be put in a good mixed and diversified investment portfolio. It's targeted to their retirement and their retirement savings. And they could leave it in there the entire time they're working and never change it. And that would probably be a pretty good option for them. So that solves kind of one problem. The other problem is that we find folks just that, I don't want to say they're lazy, but they're just very busy, I think, and they just don't have time. And so as we're talking to employees, some of our clients are like yeah, you know, I always meant to do that. I just never did. I don't know why. I just never know. And it's just because they probably never took the time to do it here. Here this kind of solves that problem for them or even especially younger people.
Jamie Nau: I know when I was first out getting work, getting involved in a 401(k) plan was important to me. I know people I talked to that were peers that weren't really into finance were like oh yeah, I keep meaning to sign up for my 401(k) plan. It's something that tends to fall to the bottom of that to do list all the time.
Kim Moore: Right, right. And you know, once it's taken out of your pay check you don't miss it because you didn't elect it, it just your employer does it. You just adjust your salary to that new amount, and guess what? 20 later, you've got a retirement savings. And it wasn't really all that hard. And you don't feel like I'm giving up something where when people have to elect and they they're seeing the difference in their paycheck, it’s the same impact there is just a mindset difference.
Jamie Nau: I know even when you get that first statement. It's you know, three months or six months in and you're like oh wow, look at how much that’s been in there. It's like oh wow, this helps, and you learn the impact pretty quickly as opposed to just trying to do the math on a spreadsheet or something.
Kim Moore: Exactly.
Jamie Nau: One more question before we kind of go a little deeper into the pros and cons. So let's say your eligibility requirements is 6 months and 18 yeas of age, and someone's been there for 5 months, do they get a letter saying you're going to be auto enrolled at that point? Is there a notification about that happening?
Kim Moore: Yeah, it depends on the process that you have in place. Some of this is handled by a service provider. So if you have a service set up where your payroll and your 401(k) are provided by the same company, they have integrated systems or maybe they're separate, but they still have integrated connections across the service provider. So they maybe doing a lot of this, and they may or may not do a notification to the employee. Another option is the employer may be doing this verification, in which case, again, they could be doing a notification and they may or may not do that. So sometimes folks get a notification, sometimes they don't. One of the things we were going to talk about is the pros and cons in the administration of this. We recommend that you do have some type of process in place where the employees some notice, because if they don't, then you may have told them earlier, maybe when they were interviewing as part of their onboarding, but maybe it takes 6 months to be eligible. So now it's 6 months later, they're probably going to forget. All of a sudden they get their next check and look and say well, wait a minute. What is this? I'm getting less. You know, most people just look at the bottom line, and if it isn't the same number that they were expecting they are going to think, what's going on? And then they'll look. A lot of times won't even remember what the deduction is for. That can cause you a lot of heartache, a lot of misunderstanding, upset employees. So we do recommend, even if that's not a natural part of maybe your service provider process, that you implement some type of notification, even if it's an email or, I don't know, just talking to them in the hall or something as a notification.
Jamie Nau: Especially if time frame is part of your eligibility requirements. I think if someone's starting right away and depending on what the eligibility requirements are. 90% of your employees are newly eligible when they start, that's fine. But I do think for sure, when you get to that 6 months or a year later, it could be a surprise for a lot of people because, again, I know the first couple of days of any job are super overwhelming. So try to remember the exact conversation about auto enrollment starting in 6 months, doesn’t always happen.
Kim Moore: When you're onboarding, there's a lot of paperwork. So you may fill out things saying yeah, I authorize you to do this. Yep, I understood, but you're not going to remember all that. Like I said, a lot of paperwork. So it can be confusing. People don't necessarily understand it. They just know I want to start this job, so I’;; sign this piece of paper.
Jamie Nau: Yeah they are more focused on those first couple of weeks. Trying to do a good job, meet the right people. They're more focused on doing work as opposed to all the paperwork they have to fill out from HR. Even like you said, doing it in their review, their one year review, just as reminder that your 401(k) enrollment is going to start. You don't want people taken by surprise.
Kim Moore: Exactly.
Jamie Nau: So let's talk a little bit more about pros and cons. So I know you already kind of mentioned them a little bit, but you're welcome to expand on those more.
Kim Moore: Let's talk a little bit more about some of the pros, because for those folks that maybe are considering auto enrollment, or have heard about it and thinking, well, should I really do this or not? The main reason folks do this, especially from the employer side, is to try to increase participation. They feel like I am spending money to have this plan. I have to have my payroll and my HR folks spend time on it. So there's a lot of work on my part and a lot of money. Maybe I'm spending for the fees and then nobody takes advantage of it. So why am I bothering with this? So they want participation. They also want participation from the employee standpoint because they don't want their employee working for them, you know, for a number of years, and then they get to the end of that time and have no retirement savings. They're trying to help the employee out with something that the employee may not they may not value right away, but they will value when they get older, and get to their age where they're getting close to retirement. So that's the main reason that we see people do this, and we do see it. It always surprises me. But when we have clients that do use the auto enrollment, participation rate is higher for whatever reason, even folks that are not highly compensated if they're set up, they just won't take the time and effort to decline it and kind of un-sign up. Generally, that's what we see. So if your goal is to get more people in the plan and get more people participating, this will usually work.
Jamie Nau: So let's take a second with the match. I think a lot of people don't understand the impact that match makes. So okay, I'm going to put $300 a paycheck or whatever the amount is. And then, like I said, you get that quarterly statement and that's $300 a paycheck is turned like $3000 because of the time frame and because of the investment growth. And now you're like, oh wow, this really is worth it. And then people say okay, and start doing the math in their head and think, if I can do that all the time this going to really pay off for me.
Kim Moore: Right. A lot of the good service providers now will give calculation's even on your statement and say if you continue at this rate when you're ready to retire, you know, it's totally an estimate, obviously. But here's what we estimate you would have available to you for retirement. Especially if you're a younger person and you see a million dollars or two million dollars or something, that's a big number that, you know, you would never save on your own. So that's one of the big pros. There's also tax advantages to the employee and there can be tax advantages to the employer to get participation up. So, again, something to consider. I would also encourage if you're maybe an HR manager and you're thinking about this, ask your employees what they think? Ask management in your company, in the various areas, you know, maybe the supervisors of some of the folks that are working for your company. What do they think? Would that be an attractive tool to, you know, in recruiting. So think about it from your employees standpoint and also consider, do you have a good mix of ages of employees? Do you have a lot of younger folks? Do you have a lot of older folks? Those things will all play into whether you want to consider this.
Jamie Nau: That's a great point. Definitely ask managers and directors, because part of their job is to retain employees and keep employees happy. So really talk about the benefits with them. I think getting their opinion on this helps. You can start a conversation that helps you say, hey, look at this benefit we have, or make sure you're using it, because you need to understand that this is going to help you out in the long run. And then, like you mentioned, some of the tax advantages. Part of it, I think going through the employees is super important.
Kim Moore: Absolutely.
Jamie Nau: I know with pros, there's always cons…
Kim Moore: So, yeah, there are definitely cons with this. And this is something we see a lot, kind of flip side of it from our clients. If you stop and think auto enroll and we go back to if you're not communicating to the employee. So you probably told them at some point that they don't realize, and they've been getting the same paycheck after paycheck, all of a sudden this paycheck has gone down and if they don't remember why, now they're all upset because how dare you take money out of my paycheck? I didn't authorize you to do that. So it can give you some upset employees. It can create an administrative nightmare for HR and payroll folks, because now they've got to spend, especially if you have a lot a lot of employees, a large employee base, and if you have a lot of turnover. So if you're going to hire a lot of folks, you're going to go through this a lot. And if the communication process isn't real solid, your HR and payroll folks are going to do a lot of conversations like well, remember, we talked, which of course they will not remember, and you will spend a lot of time on this and that's not useful. It's not a good, efficient way to manage anything. And so now you've got a lot of upset HR and payroll folks. So it's just not a good way to run the program. So communication is really important. The other thing we see if you have a lot of turnover, is that you may have a lot of lower paid employees that won't bother to turn off this election. So they're making very small amounts. We'll even see contributions of 50 cents or a dollar a pay period, very small. And if there's no match yeah, there's investment gains, but gains on a very small amount, it's not going to be very much. And if you've got a lot of turnover, so you've got an employee making maybe a dollar a pay period contribution, they stay with you 6 months. So at the end of their term of employment, they've got $25 dollars in their account. They will not bother to do anything with that when they leave. So that account is going to sit there at some point. You need to get that money out of the plan. You're going to incur administrative fees because most plans will charge you on a per headcount basis for all of the folks that are in the plan. So here's a person who's got $25 sitting there. They probably forgot about it a long time ago. They're never going to get that money out. And, you know, you could be paying a dollar a quarter or something in a fee for a $25 investment sitting there for an employee that doesn’t care. So those are things you need to think about if you're even considering whether you want to implement your own rule. One of the things that we encourage people to do is put in, along with the auto enroll process, is add in an de minimis distribution rule. So if the account is below, say $1000 - $5000, that amount is up to you, then you're allowed without the employees permission to issue them a distribution check, move the money to an IRA in their name. There's various ways that you can do that. You can do it to get the money out of the plan so you're not dealing with a whole bunch of really small accounts. Again, your HR or payroll folks would have to try to get a hold of these people once they've left. If you don't have good contact information, you're not allowed to just say well, I can't find them. I'm going to take the money. You can't do that. So there's all kinds of rules around what you can do with the money. The other thing with this is if you have an existing 401(k) plan you're going to have to do a plan amendment. That's going to cost you money to implement, which is fine if you think the pros are really worth it and it's something that you really want to implement for your employees while you're doing that. Talk to your service provider about these issues so that you can do it all at once. You don't want to do a planned amendment and then in 2 or 3 months you're like, oh, look at this. I've got a 100 really tiny accounts and I can't get rid of them and your service provider says we need to do another planned amendment to put this de minimis distribution rule. Now your fees are adding up and it's just going to be frustrating for everybody. So consider that up front. Do it all at once. We really encourage you to talk to your employees, talk to those managers out there, talk to your service provider, get some really good advice on how it's going to be a good idea for you given your employee base, given if you have a lot of turnover or not. Do you have a match? If you don't have a match, maybe this isn't a good idea for you, but think through all of that. What is it going to cost? Because usually you've got to pay extra for auto enroll. So you're going to have an extra fee on a regular basis along with the fee to do the plan amendment. Are you willing to pay for that? Does it make sense? So we encourage no go into this without thinking about it. Consider all these different things that we're talking about today before you actually go down the path of adopting an auto enroll.
Jamie Nau: It goes back to what you mentioned earlier. I think it really is a business decision. So you kind of have to talk to leadership, talk to managers and also think through the business risks. Is our business right for this? You know, like you said, think of the high employee turnover. Maybe you need to stay away from this because of administrative. It's hard to get hold of people. And then that's that money, you know that $25 is sitting in an account. So I think that you really have to think through your employee base and if this really is going to benefit them and not just do it for the sake of doing it. That's why I really liked this topic, because I know that it's something a lot of companies think about.
Kim Moore: Yeah, it is. You know, and I think you need to just consider your employees. I hear all the time, especially owners of companies, they want to do what's good for their employee base. And if they're not getting participation, they think well, I'm just about to start to auto enroll and I know what's best for them because I'm going to put this in, and then it kind of backfires on them. Then they end up with what can become an administrative nightmare. The other thing that you really need to consider is the eligibility requirements. It can be pretty straightforward in an auto enroll plan. If you say as long as you're over age 18, as soon as you are hired, we're going to put you in the plan. But if you start having pretty complicated rules around eligibility, so something like you have to work 1000 hours, you have to be over age 21 and work a 1000 hours, that's not necessarily easily measured in time. So now somebody's got to keep track of how many hours. And we have seen, maybe this year I'm somebody that comes and goes, kind of transient employee. So I come and work 100 hour this year and next year I come work 200 hours, eventually I'm going to hit the 1000 hours. So eventually I should be auto enrolled. But who is going to keep track of all of that? I mean that could be a full time job, you know, keeping track of all of these people that are coming and going. So again, another thing to look at when you're talking to your service provider, what are those eligibility requirements? And if you really want to do this, maybe when you're doing that amendment, go ahead and change the eligibility requirements and just say, nope, it's going to be automatic when you start as over 18, we're putting you in the plan. The other thing you want to think about is transition rules. So let's say you have rules currently of age 21 and a year of service you're eligible to get in the plan. What are you going to do with those people that weren't at the year point at the time you implemented this? Are they going to become automatically enrolled then? What about people that maybe met the requirement 6 years ago but chose not to enroll? Are you going to auto enroll them now? Are you going to say no? They had the chance and they didn't take advantage. So those are all things you've got to think about. You've got to make sure you understand how that's going to work. That you service provider understands so they don't do something like saying well, your plan document says A and you meant B. Then you're communicating A to your employees and then B happens, that can be a real mess. So you need to think through that as well. So there's a lot of things to think about with this.
Jamie Nau: It's definitely not an easy decision. So we have a couple minutes left I want to get our email address out. Our email address is: firstname.lastname@example.org. Again, we have this email address to make sure we are bringing topics that our listeners want to hear. So feel free to email the topics, or any questions you have about auto enrollment. So just a final thought here for you Kim, I know we talked a little bit about all the research you need to do and the conversations you need to have with people. But what else do you need to do in order to start with auto enrollment?
Kim Moore: The biggest thing, I think once you've decided you want to do this and it's right for you and with all the things that we talked about earlier, get with your service provider because you are going to need to do a plan amendment. You need to make sure they can accommodate it, make sure that they get the wording correct, make sure you understand how it's going to work and that they understand how it's supposed to work. We see a lot of cases where, you know, that's not what I meant, but that's what ends up getting implemented. But you have to start with them because they are going to be involved and they have to put together the plan amendment for this. Allow some time, because that isn't an overnight process. You know, you may want to do it right away, but they're going to need some time to put that together. So that's where I would start, it’s with them. And they will also guide you through it. They usually have a form that you can kind of fill out. It's got a little checkboxes and that will help guide you through the process. So that's where I would start right now.
Jamie Nau: I think that's very helpful. And like I said, I think our listeners got a lot out of this. I know I definitely learned. It is nice to talk through the pros and cons. You don't think through those all the time so hopefully the listeners got the same out of it. So any final thoughts for anyone listening?
Kim Moore: I don't think so. If anybody has any questions and you're considering this and you want to kind of talk through a little bit more in-depth on some of the things we talked about, feel free to use that email address you out there. I'd be happy to go one on one, talk to anybody that has any questions.
Jamie Nau: Awesome. Thank you Kim!
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