Because the number of Americans covered by traditional pension plans is dwindling, the Pension Protection Act of 2006 made provisions for companies to automatically enroll employees in defined-contributions plans − better known as 401(k)s, 403(b)s and 457s.
Rules for automatic enrollment
If your employer puts in place automatic enrollment, they must follow certain provisions, depending on the type of auto enrollment offered.
Types of Automatic Enrollment1
Basic automatic enrollment (Automatic Contribution Arrangement or ACA):
Your employer automatically enrolls in the plan unless you elect otherwise. Your plan document specifies the percentage of wages that will be automatically deducted
- Employees can elect not to contribute or to contribute a different percentage of pay
Eligible automatic contribution arrangement (EACA):
Your employer’s plan will uniformly apply the deferral percentage to all employees after giving you the required notice
- May allow employees to withdraw automatic contributions, including earnings, within 90 days of the date of the first automatic contribution
Qualified automatic contribution arrangement (QACA):
Your employer will automatically funnel at least 3% of your salary into a retirement savings account on your behalf. Each year thereafter, they must increase your contribution by 1% of your salary until you reach the minimum deferral rate of 6%, but no more than 10%.
They must also contribute one of the following into your account:
- A 100% match on the first 1% of your pay, plus 50% on the next 5%, for a total match of 3.5%; or
- A non-elective contribution of 3%
You must also be fully vested in the plan within two years. Being vested means that after two years, the company match belongs to you even if you leave the company.
Default investments if employee does not make an election1
Your employer must choose an investment for your automatically deducted salary deferral contributions that will meet certain criteria for transferability and safety, such as a life-cycle fund or balanced funds (QDIA). You must be given an opportunity to change your investment choice.
Benefits of automatic enrollment
You are saving for retirement
It’s easy, convenient and ideal for today’s mobile workforce. You have access and control of your money (subject to distribution penalties and charges).
You are in control
With automatic enrollment, you still can choose how your retirement funds are invested. Be sure to check your retirement account regularly to make sure that the contribution rate and investment options line up with your retirement goals.
You control your account and also may take money out subject to your plan’s rules and to distribution penalties and charges. Withdrawals are taxed as ordinary income and may be subject to a 10% penalty if taken prior to age 59½.
You can opt out
Although companies are encouraged set up automatic enrollment, they’re not required to. Nor do you have to participate. If your plan is an EACA or QACA, you may have 90 days to opt out and any money that was deferred will be returned to you.