Step by Step: Automatic Retirement Plan Features

Depending on your age, Step by Step by New Kids on the Block might be stuck in your head right now. Or maybe your mind went to the 90s sitcom on ABC. Our mind went where it always is: retirement. Helping Americans save, step by step, and finding the best solutions for participants and business owners.

An awareness of the need for a retirement plan is a good first step towards planning for the future. Then, finding the appropriate service providers to help set one up/give the best advice is another great step. One more step employers can take to help themselves and their employees? Adding automatic features to their retirement plan. Let’s take a look at the benefits of auto enroll and auto escalate features, along with best practices for maximizing these benefits.

Three steps forward, no steps back: The benefits of automatic enrollment

After stepping on the “sponsoring a retirement plan” train, the next step is determining which plan type and provisions are best for the business and its employees. EGPS is here to help with that! One provision that can be added to retirement plans, automatic enrollment, comes with several benefits. Automatic enrollment:

  • Increases participation. A study done by researchers at Vanguard showed new hire participation rates of 91% in plans with automatic enrollment, compared to a 28% participation rate in those without it. That’s more than triple the participation rate! Thus, this drastic improvement in employee participation is a huge benefit of automatic enrollment.  It’s definitely a step in the right direction.
  • Increases chances of passed nondiscrimination tests. If plans aren’t safe harbor, they typically have to pass ADP or ACP tests annually. These tests potentially limit the highly compensated employees’ contributions based on the average contribution rates of the non-highly compensated employees. However, if non-highly compensated employees increase their participation rates across the board, the discrepancy between contribution rates of these two groups will most likely be less, leading to a higher likelihood that the highly compensated employees can contribute more. Staying one step ahead in plan compliance is always a good thing!
  • Provides a potential tax credit. Employers with no more than 100 employees may be eligible for a $500 tax credit each of the first three years a plan adopts a certain type of eligible automatic enrollment feature. This credit is available regardless of the plan’s effective date. Who doesn’t love a tax credit? This can definitely put some pep in an employer’s step!

Step it up with automatic escalation

Another great step employers can take to up their retirement plan game is implementing an automatic increase in contributions. This typically is set up to increase one percentage point a year and can cap out as high as 15 percent. Automatic contribution increases not only help participants save more for their retirement, but also lead to higher contribution rates. Once again, this increases the chances of employers passing ADP/ACP testing and allowing employees to “set it and forget it”.  Thanks Ron Popeil.

Two small steps for employers, one giant leap for retirement savings

Saving for retirement is definitely a step by step process. As Whitney would say (or sing): stone by stone, brick by brick. That’s how retirement savings is built. Employers can adopt automatic plan provisions as a step in the right direction: helping retirement savings grow, gaining potential tax credits, and increasing their chances of compliance. Sound good? We certainly think so. However, employers should act now if they want to cash in on these benefits; many automatic options must be established soon to be applicable for the next plan year.

Interested in more information about automatic retirement plan features and adding them to plans? Fill out the form below and we’ll send you more materials on these options and answer any questions you may have! We’re here to help.

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