Facts
We have considered automatic enrollment for our 401(k) plan but have, thus far, decided not to implement it. However, for our employees that do sign up to defer, we would like to offer them a way to elect automatic deferral increases at set intervals throughout the year.
Question
Is it possible to simply add a box to our deferral election form for participants to select these automatic increases or do we have to amend our plan document to do that?
Answer
This is a bit challenging to answer in that it depends to a large degree on what your plan document says. Many prototype and volume submitter plan documents give the plan sponsor the authority to establish an administrative procedure (apart from the plan document) that governs the employee enrollment process, including making elections on how much to defer.
If your plan is written that way, it is very likely that you can accomplish your objective via the deferral election form without amending your plan document. You wouldn’t be able to default participants into the automatic increases, but it doesn’t sound like that is what you are trying to do here. As long as participants have to opt in and are free to opt back out, then using the deferral election form should be acceptable.
There are some practical limitations, however. One is that someone has to keep up with who has or has not signed up for the automatic escalations, and make sure the proper people get escalated at the proper time. If someone is missed or someone gets mistakenly escalated, it's an operational failure. The corrections for both are relatively easy, but they still take some time and effort which translates to cost and potential negative PR with employees. You definitely want to make sure you have solid internal controls in place before implementing something like this.
For more information on plan sponsor requirements, visit our Knowledge Center here.
