Chapter 27. Automatic Enrollment

REMEMBER THE RULES about discrimination testing? (see p. 69 for details.) Plan sponsors must perform tests to make certain that their plans do not unduly favor the highly paid employees over the rank and file. One important way to draw in the lower-paid employees is with the company match, of course. But in the first decade of the twenty-first century, employers and consultants began to look for a way to enroll employees in the plan so that they would automatically become participants when they joined the company unless they specifically elected to opt out.

The Pension Protection Act of 2006, the most important piece of pension legislation since ERISA, helped make automatic enrollment in 401(k) plans possible. Before that, laws in thirty-one states prohibited any paycheck deduction by an employer without employee consent. The Pension Protection Act overrode the laws in those states and allowed companies to automatically enroll an employee in the plan. But the company must tell the employees that the money will be deducted from their paychecks and deposited in the 401(k) plan, according to Kyle Brown, retirement counsel for Watson Wyatt in Washington.

The employer must also give employees the right to opt out of the plan and to get their money back after the first two paychecks if they choose, says Brown. If an employer uses automatic enrollment and follows a specific formula—deducting 3 percent of an employee's pay when he is first eligible and depositing ...

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