It’s a series of automatic features to get your employees on track for a successful retirement. This means getting them automatically enrolled, automatically increasing their contributions, and automatically investing their money while providing greater fiduciary protection for you as a plan sponsor.
Today we’ll review the top two automatic features. Your employees may opt out of one or all of these features at any time. I’ll show you why they are so beneficial and how you can put them into action.
The first feature is automatic enrollment, which is one of the easiest ways to save time, money, and effort. Instead of sending out a retirement form to your employees that they may or may not return to you, all you need to do is send out a 30-day notice notifying them that they’re eligible for the retirement plan and they’ll be automatically enrolled in the plan at a specific rate.
For example, if your match is 50% on 6%, you might want to set that contribution rate at 6%. Retirement plan rules allow you to go as low as 1%, so that is an option if you’re worried about taking too much out of your employees’ paychecks right away. However, we’re seeing the best results if you set the auto-enrollment rate at 6%. I recommend that you set the contribution rate to maximize the company match. After all, the name of the game is getting people to save for retirement, and people usually need to save about 10% a year.
The key to automatic enrollment is in the 30-day notice. You’re protected from any issues primarily because you’ve given your employees that notice and they have the option to opt out at any time. However, most people who are automatically enrolled in the plan stay in the plan, even after multiple years.
My experience is that most employees know they should save money, but life just gets in the way. You know how that feels. The next time somebody brings it up, they think “Yeah, that’s a good idea. Maybe I should do that.” And then the next time comes up again. Automatic enrollment overcomes this common reason for employees not to contribute.
The second feature is known as the QDIA. QDIA stands for “qualified default investment alternative.” The Pension Protection Act and QDIA regulations allow the plan sponsor—you—to automatically invest in employees’ contributions in the retirement plan. Typically, a QDIA is a series of target date investment options based on an employee’s age.
The key to the QDIA is also all about the notice. You have to send them something that states if they don’t make an election, ongoing contributions will be defaulted into the QDIA. Provided you follow a documented prudent process to select and monitor the QDIA, you will not be liable for making the investment choice for the employee.
The bottom line is that using automatic features is easy, convenient, faster, and cheaper. Also, if you do your initial and ongoing due diligence, you are protected thanks to the Pension Protection Act and the DOL regulations. In the end, your employee is the person who will benefit, as they are automatically saving invested money to create that paycheck for life.
If you have any questions on how to implement automatic features into your retirement plan, please feel free to send me an email or give me a call. I’d be happy to help.