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More Companies Going Automatic for All Workers

November 30, 2005
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An increasing number of companies are starting to automatically enroll existing employees, not just new hires, into their 401(k) plans.

Just a few years ago, the notion of sweeping new employees into a 401(k) made employers nervous, fearing that they would be held liable for their workers’ investments. But as the Internal Revenue Service has given guidance saying that it’s appropriate for employers to do this, more companies have embraced the practice.

A 2005 Hewitt Associates study found that 79 percent of the employers that offer automatic enrollment only do so for new hires, down from 89 percent in 2003. Meanwhile, 22 percent of companies offering automatic enrollment do so for all employees, up from 11 percent in 2003.

"A lot more people are saying autopilot is the way 401(k)s ought to be run, and so employers are more comfortable," says Michael Weddell, a retirement consultant with Watson Wyatt Worldwide.

Kinder Morgan, an energy company in Houston, started automatically enrolling new hires in 2003, and extended the practice to current employees in October. All employees have the ability to opt out of the plan.

The firm has a cash-balance plan in which all 3,500 employees can participate, says Sandy Ward, manager of qualified plans. But given the uncertain future of the legality of these plans, Ward says she wanted to get its 401(k) participation rates up. "We really want to make sure our employees save enough for retirement," she says.

Kinder Morgan saw its 401(k) participation jump from 60 percent to 75 percent when it began automatically enrolling new hires into its 401(k) plan, and hopes to see it exceed 90 percent by enrolling existing employees, Ward says.

Under the program, 3 percent of an employee’s salary is automatically swept into a balanced fund. The company decided on the low percentage because the average annual salary at Kinder Morgan is only $30,000, Ward says. "We are taking baby steps."

Ultimately, she would like to raise the amount to 8 percent. Ward has not heard any negative feedback about the program so far, but she plans to conduct an employee survey next year.

Some companies, like Trinity Health, are shying away from automatically enrolling existing employees into a 401(k) plan because they are worried about backlash. The Novi, Michigan-based health care provider is considering automatically enrolling new hires into its 401(k), but not existing employees, says Silvia Frank, manager of the company’s defined-contribution plan.

"If current employees haven’t been contributing, it’s probably because they have some preconceived notion about 401(k)s, and they would probably react more strongly if we just swept them into the feature," Frank says.

The cost of the employer’s match is another reason some companies are holding off on automatically enrolling existing employees into a 401(k), Weddell says. The average employer match is 50 cents for every dollar contributed by the employee, up to 6 percent of pay.

For Kinder Morgan—which contributes 4 percent of company stock into all employees’ 401(k)s, whether they contribute or not—this is not an issue, Ward says.

Jessica Marquez

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