Automatic Enrollment in 401(k) Plans

Publication Date: August 2006

Publisher: Library of Congress. Congressional Research Service

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Research Area: Banking and finance

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Abstract:

Most employers that sponsor retirement savings plans under 401(k) of the Internal Revenue Code (IRC) require employees to decide whether to enroll in the plan. The Internal Revenue Service (IRS) has issued rulings to inform employers that it is permissible under current law to enroll employees in these plans automatically, provided that the employee is notified in advance and is permitted to leave the plan if he or she chooses to do so. Automatic enrollment, in which a percentage of the employee's salary is placed in an individual account without requiring the worker to take any action, has been shown to increase worker participation in 401(k) plans and similar salary reduction retirement savings plans. In 2004, automatic enrollment had been adopted by an estimated 11% of 401(k) plans. About 1% of plans with fewer than 50 participants and 31% of plans with 5,000 or more participants had automatic enrollment in 2004. H.R.4, the Pension Protection Act, includes provisions to promote automatic enrollment.