With the passing of the Pension Protection Act (PPA) of 2006, automatic enrollment became more attractive to plan sponsors. This is based, in part, on certain key provisions:

• Qualified Default Investment Agreements (QDIAs) offer a safe harbor to the plan sponsor with regards to the default investment (provided it meets certain criteria as outlined by the U.S. Department of Labor).
• Permissible withdrawal provisions provide guidance on returning default elective deferrals to participants.

Provisions like these have helped reduce early plan sponsor concerns toward automatic enrollment, and may also assist your clients in evaluating their retirement needs. That is because they answer two of the biggest questions plan sponsors have had about automatic enrollment:

• Who is selecting the default fund for the participants?
• Can the employees get their money out, if they absolutely do not want to be enrolled?

Conventional wisdom tells us that automatic enrollment would be ideal for mid- to large-sized employers who have a large population of newly-eligible employees. However, a properly designed retirement plan, which includes automatic enrollment, may be suitable for an employer of any size.

For example, consider your clients who offer a safe harbor plan. Without automatic enrollment, immediate vesting is required. Unfortunately, many of these employers make matching contributions to employees who turn over in a relatively short period of time. Over time, this can increase the employer’s plan operating expenses.

However, another provision of the PPA enables your clients who offer automatic enrollment with safe harbor to implement a two-year cliff vesting schedule (versus immediate vesting). As a result of this provision, funds from employees who leave the company before being vested are forfeited back into the plan.

Taking this a step further, the flexible billing options available with Paychex Retirement Plan Administration permit these forfeitures to be used to pay the monthly administrative fee of the plan sponsor’s retirement plan.

As your client’s most trusted advisor, the opportunity to consult with your clients regarding combining auto enrollment with safe harbor can be a strategic benefit to all of your clients — not just larger ones — especially those with high turnover rates in the first two years of employment. Auto enrollment could actually save your clients considerably. With 401(k) plans administered by Paychex, those monies forfeited by the terminated plan participants can be used to offset the monthly administration fee.

To learn more about how to make the PPA work for your clients and their employees, visit www.paychex.com or call 1-800-322-7292.

Paychex is proud to be the preferred provider of payroll and retirement plan services for CPAs through the AICPA Business Solutions Program.