SEPTEMBER 2005 Pension Plan tip of the month...

As a part of our continuing efforts to keep you informed, we want to make you aware of some language the IRS has approved allowing the implementation of plan provisions allowing “Automatic Enrollment” or “Negative Election Enrollment” in qualified retirement plans.

As of 2003, (per The Congressional Research Service) 8% of all plans used this enrollment option. 1% of plans with less than 50 participants and 24% of plans with over 5,000 participants have instituted negative enrollments.

This method of enrollment is not designed to change the decision-making process that most eligible employees go through to join the 401(k) Plan. Rather, its purpose is to prompt those eligible employees who would not otherwise decide to join the Plan to contribute by having the employer make an automatic deferral election, generally at a deferral rate of around 3% or 4%, on their behalf.

Potential benefits include:
• Increase of overall plan’s contribution rate.
• Increased contribution rates help the plan pass nondiscrimination testing.
• Employees may be more likely to accrue larger balances within the plan.

There are also a number of issues to consider before implementing this option. Some of these are:
• Increased employee notification is required.
• The Plan must be amended to allow this provision.
• Selecting a default fund constitutes a fiduciary act of asset management under ERISA and is not covered under section 404(c).
• Some states have wage payment laws requiring employee consent to any deductions from wages.
• May be difficult to promote if you have geographic/or language barriers.
• Cost of matching contributions could increase.
• Administration time and expense could increase due to the creation of numerous small balances.
• Beneficiary information should still be collected and maintained.

It’s important to note that Congress is considering legislation that may lessen or eliminate many legislative and reporting obstacles. Though there is strong political support for this, there is no guarantee these changes will become law.

Every plan and every employer is unique and this provision may not be feasible in all situations. If you would like to explore this option for your plan, please contact your plan’s investment advisor or your Paragon Account Executive. We also strongly recommend discussing it with legal counsel.