ADDING AUTOMATIC

ENROLLMENT TO

YOUR 401(k) PLAN
Why Add Automatic

Enrollment to Your

401(k) Plan? 

By providing a 401(k) plan to your

employees, you have helped many 

of them start on the road to a secure

retirement. You may be looking to

increase participation in your plan so

that more of your employees will get

started. If so, an automatic enrollment

401(k) plan may be the option for you.

Automatic enrollment permits you 

to act on your employees’ behalf by 

getting them to build their retirement

savings with pre-tax employee contributions and matching contributions from

you. 

Currently, about one-third of eligible

workers do not participate in 401(k)

plans when offered at their workplaces.

Automatic enrollment can reduce the

number of employees that do not participate in these plans and can significantly

increase their retirement savings. And

once your employees are in the plan, it

is likely that they will stay in the plan.

By adding an automatic enrollment 

feature to your 401(k) plan, you provide

your employees with an important longterm benefit that will help you attract

and retain qualified employees.

Automatic enrollment 401(k) plans 

offer additional advantages. Employers

may invest the accounts of automatically-enrolled employees in a default

investment that is designed to grow

employees’ accounts at the pace needed

to build adequate retirement savings.

Moreover, the employer may be protected from fiduciary liability for having

chosen default investments that meet

certain requirements.

Automatic enrollment also offers significant tax advantages, including deduction

of employer contributions and deferred

taxation on contributions and earnings

until distribution. Automatic enrollment

increases participation, thereby making

it more likely that a plan will pass the

Internal Revenue Code’s nondiscrimination testing. 

With more workers approaching 

retirement, saving is a high priority.

Automatic enrollment 401(k) plans are

an effective way to get employees to

save now and to continue saving.

Helping Employees

Save for Retirement

There may be many reasons why

employees have not enrolled in a plan.

Maybe they need the money to buy a
car, pay off debts, save for their children’s education, buy a home, or just

pay their daily living expenses. Maybe

they think that retirement is too far

away to start saving now. Or maybe

they intend to sign up, but just haven’t

gotten around to it. 

Today, people are living longer and 

the cost of retirement is increasing. 

As you already know, an employer has 

an important role to play in helping

employees save: workplace retirement

plans are a highly effective way for

employees to save, and automatic

enrollment helps them take advantage 

of the plan and keep saving.

Limiting Fiduciary

Liability

You may not have considered an 

automatic enrollment feature because

of concerns relating to potential 

fiduciary liability for losses to employees’ accounts if you select investments

for employees who fail to provide

investment directions. However, you

can limit this liability by investing these

employees’ accounts in certain default

investments that, over the long run, are

designed to minimize the risk of large

losses but to provide long-term growth.

Examples of investments that can be

used include lifecycle funds, balanced

funds, and managed accounts. You may

already offer one of these investments

as part of a broad range of investment

options in your plan.

To take advantage of this fiduciary

relief, you need to notify your employees that they can direct their own 

investments and that you will invest

their contributions if they do not provide instruction. You also need to

describe the default investment that 

you select for your plan.

Finally, State wage withholding laws 

are not a barrier to automatically

deducting employee contributions 

without employees’ permission.

For more information about automatic

enrollment 401(k) plans, see Automatic

Enrollment 401(k) Plans for Small

Businesses, Publication 4674, available

from the U.S. Department of Labor’s

(DOL’s) Employee Benefits Security

Administration and the IRS. It is 

available by visiting their Web sites at

www.dol.gov/ebsa and www.irs.gov/ep.

You also can order the publication by

calling toll free 1-866-444-EBSA (3272)

for DOL, or for the IRS, 1-800-TAXFORM (1-800-829-3676).
U.S. Department of Labor