Advocating 401(k) Automatic Enrollment
The Washing D.C. based Brookings Institute has a recent article advocating the use of automatic 401(k) enrollment. The article notes that automatic enrollment would solve the problem of minimal participation in plans (particularly among lower level employees, I would add). The authors suggest automatically enrolling employees with a 3% contribution and allowing them to take the step to opt out if they so choose. The authors liken the concept of automatic enrollment in a 401(k) to automatic enrollment in a define benefit pension plan. The article further cites 4 building blocks of automatic enrollment:
- automatic enrollment (3%) with an opt out feature
- automatic escalation when employees are given raises
- automatic investment
- automatic rebalancing of accounts
The article further notes that enrollment jumps from an average 15% for low wage earners to 80% with automatic enrollment and that with automatic escalation, average contributions rose from 4.4% pf pay to 10.6 % of pay. I previously noted in a previous post regarding the new IRS regulations which permit automatic rollover of plan balance upon termination.
