The "Automatic Road" to Retirement By: Courtney SchenkelCPA
Imagine driving down the highway in autopilot mode, focused on the slow moving vehicle you’re catching up to and your favorite song on the radio. You signal left to pass, you check your mirror, you begin to turn the wheel…Whoa! That was close. While you had been watching everything happening in front of you, a car snuck up alongside of you. The vehicle was there all along, but if you hadn’t checked over your shoulder at the last second, it would have been too late to avoid an accident. In much the same way, automatic features of employee retirement plans can go unnoticed until an employee goes to “change lanes.” It is vital that employers and employees are aware of their benefit plan details in order to understand how and when to check their blind spots, even with automatic features in place. In this age of technology and automation, we often expect once our retirement plan has been set up, we can trust it to continue running effortlessly while we focus our efforts elsewhere. After all, isn’t that why it’s automated? But just like how we need to remain aware while driving, we need to keep a steady eye on the automatic features of employee retirement plans.  Specifically, three key features: automatic enrollment, automatic escalation, and withdrawals of unintended automatic contributions. 

Employers and employees alike are drawn to the ease of automatic enrollment. This feature allows employers to automatically reduce an eligible employee’s wages and qualify as elective deferrals. The IRS allows three types of automatic enrollment plans that intend to increase program involvement, give potential tax savings, and help employees automatically save for a retirement that may feel distant and out of reach. However, these positive attributes should come with a heightened awareness of potential issues. Employers need to carefully consider how they set up automatic enrollment plans from the beginning. Setting an enrollment percentage too low may negatively impact an employee’s benefits.  Or, from the opposite perspective, setting an automatic enrollment percentage too high may cause employees to completely opt-out of a plan. The plan’s investment options should be reviewed regularly, and employers should verify that proper enrollment procedures are being followed. Employers should also ensure that employees are given thorough information and clear communication regarding the plan, including eligibility requirements and other automatic features. A lack of communication with employees about the enrollment features can quickly create an uncomfortable and apprehensive situation if an employee feels misinformed or surprised by unexpected withholdings from their wages.  Additionally, employees may avoid “changing lanes” from the automatic employer established deferral percentage and assume that the automatic withholdings will achieve their retirement goals. It is imperative to educate employees on their retirement needs and the projected contribution amounts that may be necessary to attain those retirement objectives. It should not be assumed automatic enrollment is an appropriate substitute for careful and dynamic retirement planning. Much like cruise control can only assist a driver, an automatic enrollment feature can only assist an employee in his/her retirement endeavors. 

A second beneficial feature of automated retirement plans is the automatic escalation (or increase) feature. Generally, automatic escalation will increase an employee’s elective deferral by an established percentage, or amount, each year up to a specified maximum. For example, initial automatic enrollment contributions are 3% of employee compensation, increasing 1% annually, up to 10%.  Matching contributions are often required to be made, or offered, by employers, which will be financially tied to the escalation feature. As employee withholdings automatically increase, there will be a corresponding increase in the employer match. A potential pitfall due to the complexities of this feature may include increased administrative time to incorporate these annual increases and educate employees. As noted in research conducted by Aon Hewitt, participation rates are high in automatic enrollment plans; however, the savings rates are much lower. Oftentimes, not until an employee shifts gears and seriously begins planning for retirement, will the blind spot become evident.  Participants in plans without features like auto escalation may feel lulled into a greater sense of false security about their retirement savings. The escalation feature attempts to increase employee withholdings over a period of time and encourage the increase availability of funds upon retirement.   

As noted earlier, there are several types of allowable automatic enrollment plans, and it is crucial that employers educate their employees on the automatic features available to them. If proper instructions are not provided, employees may feel misled if unexpected withholdings are taken from their wages. Employees may feel as if they were blindly led into enrolling in a plan that did not meet their expectations. Oftentimes, if caught by surprise, employees will request to rectify any misunderstandings by withdrawing their contributions from the plan. Depending on the plan election, employees may get an allowable window of 60 to 90 days to withdraw any contributions that were automatically made on their behalf. If not acted upon quickly, this limited window can create turmoil between employers and employees, as there are penalties for withdrawing funds outside of this time frame. Employers need to make sure that employees are fully aware of these time frames. While being able to withdraw contributions is a great caveat that helps employees who felt surprised or unprepared for automatic contributions, it can lead to some serious problems if not properly considered. Employees and employers need to be aware that any withdrawals made in this window revert the automatic contributions back into the employees’ taxable income. For employers, this involves making sure the appropriate payroll taxes are paid, any employer matches are properly forfeited, and the employee is made aware of any tax implications.

Michael Schumacher, a Formula One race car driver, once said, “The more precisely I can drive, the more I enjoy myself.” Automatic features included in retirement contribution plans provide many benefits and options to ensure that the road to retirement is enjoyable. When maneuvering around the blind spots of retirement planning, changing lanes and making pit stops and U-turns are expected. The advantages of automatic enrollment, automatic escalation, and,  when necessary, withdrawals of automatic contributions, are a strong starting point for retirement savings. When combining these automated features with regular maintenance checks, you can make the drive a smooth one. 
Courtney S. Schenkel

Courtney Schenkel, CPA, a Director at EFPR Group, LLP, is recognized for her involvement in the firm’s attest department as the employee benefit service line leader and member of the commercial service team. In these roles, she is responsible for the completion and technical review of the firm’s defined...

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