CRS: Automatic Enrollment on the Rise

In its report entitled ‘Automatic Enrollment in Section 401(k) Plans’, the Congressional Research Service (CRS) stated that the Internal Revenue Service (IRS) has made it clear that automatic enrollment is legal if employees are notified beforehand and are permitted to decline. CRS says that this process tends to increase participation in 401(k)s and other salary reduction retirement savings plan (See Plan Design Impacts Participation Rate ).

There is a gap between participation rates between large and small employers. Of plans with less than 50 participants, only 1% had automatic enrollment, compared to a 24% level for plans with over 5,000 participants, as of 2003. Consulting firm Hewitt Associates has shown that the number of mainly large plans using automatic enrollment is up from 7% in 1999 to 14% now. However, this number has been stagnant since 2001.

The CRS report also detailed policy issues that must be looked at in order to improve contribution rates into such plans. Once such policy change came about in May when the IRS stated that the automatic contribution rate could be higher than the 3% previously thought to be a satisfactory level. Legislation was also discussed as a means to increase participation rates, with one example being the clarification of rules allowing automatic enrollment with regards to state laws that do not allow such action.