Rob Krupa, CPC

Is Auto-Enroll Right for Your 401(k) Plan? Learn the ins and outs of this popular plan feature that streamlines the participant experience. “Maybe when I make more.” “Maybe when I pay off my student loans.” “Maybe when my horoscope tells me it’s time.” When it comes to employees enrolling in their 401(k)s, there’s always a reason why now isn’t the right time. But the fact is the best time to save for retirement is right now, while time and the power of compounding growth are on their side. That’s where 401(k) automatic enrollment—or ‘auto-enroll’ for short—comes in. It gives your employees the gentle nudge they might need to start saving for retirement. Before we dive into auto-enroll and whether it makes sense for your company, let’s take a moment to celebrate your journey toward finding the 401(k) plan that’s right for you! If you’re reading this article, you’ve reached one of the final key considerations of plan design. Another key consideration? That’s whether getting a pass on most compliance testing is worth the employer contribution requirements of a Safe Harbor 401(k) plan. If you go the Safe Harbor route, then your specific flavor of auto-enroll may be called a Qualified Automatic Contribution Arrangement (QACA). We’ll cover QACAs and the two other types of auto-enroll below. How 401(k) auto-enroll works As the name implies, automatic enrollment lets employers automatically deduct elective deferrals from employees’ wages. Simply put, it means your employees don’t have to lift a finger to start saving for retirement. Compare that to the typical enrollment process where employees must go online, make a phone call, or submit paperwork to access their retirement plan. All those little steps take real effort, and employees who are on the fence about enrolling might not be bothered to do it. Before they know it, years have passed, and they’ve missed out on valuable time in the market that they will never get back. Or you can do them a solid and make it all automatic. If you decide to add an automatic enrollment feature to your 401(k) plan, you must notify your employees at least 30 days in advance. After you do, they have three options: Opt out. Employees can opt out of 401(k) plan participation in advance. At Betterment at Work, by the way, we make it simple for employees to do this online. Customize their contribution amount or investments. Instead of enrolling with the default automatic enrollment elections, employees can stay enrolled but choose their own contribution rate. Do nothing for now and enjoy the ride. Here we see the beauty of automatic enrollment. Employees don’t have to do anything to start investing. Once the opt-out timeframe has elapsed, they’ll automatically begin deferring a certain percentage of their pay to their 401(k). Employees are typically informed each year that they can opt out from this enrollment. As you can imagine, option C is a popular choice. Among our clients who use auto-enroll, the employee participation rate is nearly 90 percent. The three types of automatic enrollment Before we go into each, a warning: we’re about to throw even more acronyms at you. If you’re allergic to alphabet soup, prepare accordingly! All three types of auto-enroll require that employees be enrolled at preset contribution rates and have the options to opt out or change their contribution rates. That’s effectively where a Basic Automatic Contribution Arrangement (ACA) begins and ends. Two other varieties add a few more wrinkles on top of that. With an Eligible Automatic Contribution Arrangement (EACA), employees can also request a refund of deferrals within the first 90 days. Employers come to a Qualified Automatic Contribution Arrangement (QACA) by way of a Safe Harbor 401(k) plan. That means they’ve already committed to, among other things, a specific threshold of employer contributions. Safe Harbor plans that include auto-enroll must also steadily increase their employees’ contribution rates each year in what’s often referred to as automatic escalation. We offer auto-escalation at no added expense for all new plans. Here’s how all this shakes out in grid form:   Basic Automatic Contribution Arrangement (ACA) Eligible Automatic Contribution Arrangement (EACA) Qualified Automatic Contribution Arrangement (QACA) Employees enrolled at preset contribution rates ✓ ✓ ✓ Employees can opt-out or change contribution rates ✓ ✓ ✓ Employees can request a refund of deferrals within first 90 days   ✓   Requires employer contributions (i.e. Safe Harbor)     ✓ Requires annual increase in employee contribution rate up to at least 6% (i.e. auto-escalation)     ✓ Auto-enrolled, but at how much? With auto-enroll plans, you pick your employees’ default contribution rate. This begs the question: how high should you set it? A default contribution rate of 3 percent used to be the most common, but that changed recently. According to The Plan Sponsor Council of America’s 64th Annual Survey, a 6 percent rate became the most popular in 2020. And if it helps any in your decision-making, our own data shows no evidence of higher default contribution rates leading to higher numbers of opt-outs. In addition to the default contribution rate, you’re also responsible for selecting the default investments for employees’ deferrals. This is what’s referred to as a Qualified Default Investment Alternative (QDIA)—and it can help limit your investment liability. Betterment at Work covers this base for all our 401(k) clients by defaulting employee deferrals into our Core portfolio, which meets QDIA criteria for transferability and safety. One potential downside of auto-enroll Making it easier for people to invest and save for retirement is a good thing. It’s sorta our thing. And if you have a Traditional 401(k) plan, an increased participation rate makes it more likely that your plan will pass the required compliance tests. However, there’s one downside to consider, and it’s mostly a matter of perspective. If you set your default contribution rate relatively low—let’s say less than 6 percent—and don’t actively encourage employees to bump that up as much as they can, they may not get on track to retire by their desired age. Is it better than saving nothing for retirement? Absolutely. But because employees didn’t actively choose the rate, they may not be inclined to increase it on their own. Wondering how to combat this retirement saving inertia? Well, it can be partially addressed by the aforementioned auto-escalation, which steadily increases employees’ contribution rates each year. We also help by offering your employees personalized retirement advice that helps keep them on track. How Betterment at Work makes ‘auto’ even easier As a digital 401(k) plan provider, we can help your employees save for their futures with compelling plan design features like auto-enroll. Our intuitive tech and committed service also lightens your administration load in the process. And let’s not forget about auto-escalation, which we offer at no added cost to new plans. Let us handle the work of monitoring who gets escalated. If your payroll provider is one we offer 360-degree integrations with, we'll even implement the increase ourselves. Last but certainly not least, we guide your employees through their contribution rates, investment options, and more. Even if your employees were auto-enrolled in the plan, they’ll get the encouragement they need to keep moving closer to retirement.

Safe Harbor vs. Traditional 401(k) Plan: Which Is Right for You and Your Employees? Weigh the pros and cons of each carefully before making a decision for your company. 401(k) lingo can seem funny at first glance. There's "MEPs" and "PEPs," “QDIAs” and "Safe Harbors." And don't even get us started on "QACAs." But for now, let's linger on Safe Harbor 401(k) plans. If you’ve concluded that a 401(k) is right for your company, the next decision you face is what kind of 401(k) plan. They come in two primary flavors, with the Safe Harbor variety providing an alternative to the Traditional 401(k) plan. Does the “Safe Harbor” name mean the traditional route is riskier? Not necessarily. There's a host of pros and cons to each plan type. The best fit for your company depends ultimately on your unique situation. Keep reading to try on a Safe Harbor for size. Editor’s note: If you’re reading this during the first half of the year, with eyes on possibly implementing a Safe Harbor plan the following year, time is of the essence! Learn more about Safe Harbor setup deadlines below. Table of contents Safe Harbor 401(k) plans in a nutshell How nondiscrimination testing can trip up small businesses Safe Harbor may make sense for you if … Safe Harbor setup deadlines What Betterment at Work brings to your Safe Harbor 401(k) setup Safe Harbor 401(k) plans in a nutshell Safe Harbor plans offer companies an enticing deal. Contribute to your employees’ 401(k)s, the federal government says, and we’ll give you a free pass on most compliance testing. There's plenty more nuance to them of course (keep reading for that), but this is the key distinction. In Traditional 401(k) plans, employer contributions are allowed but not required—and you face the added burden of annual testing.  As with all things in life, Safe Harbor plans come with tradeoffs. Matching your employees’ contributions—or contributing regardless of whether they do through what’s called a nonelective contribution—is great for your employees' financial wellbeing, but it could also increase your overall employee budget by 3% or more depending on the size of your contribution. How nondiscrimination testing can trip up small businesses Federal law requires annual nondiscrimination tests, which help ensure 401(k) plans benefit all employees—not just business owners or highly compensated employees (HCEs). Because the federal government provides significant tax perks through 401(k) plans, it wants to make sure these benefits don’t more heavily favor high earners. The three main nondiscrimination tests are: Actual deferral percentage (ADP) test—Compares the average salary deferrals of HCEs to those of non-highly compensated employees (NHCEs). Actual contribution percentage (ACP) test—Compares the average employer matching contributions received by HCEs and NHCEs. Top-heavy test—Evaluates whether a plan is top-heavy, that is, if the total value of the plan accounts of “key employees” is more than 60% of the value of all plan assets. The IRS defines a key employee as an officer making more than $200,000 in 2022 (indexed), an owner of more than 5% of the business, or an owner of more than 1% of the business who made more than $150,000 during the plan year. In practice, it’s easier for large companies to pass the tests because they have a lot of employees at many different income levels contributing to the plan. If, on the other hand, even just a few HCEs at a small-to-midsize business contribute a lot to the plan, but the lower earners don’t, there’s a chance the 401(k) plan will not pass nondiscrimination testing. You may be wondering: “What happens if my plan fails?” Well, you’ll need to fix the imbalance by either returning a portion of the contributions made by your highly compensated employees or by increasing the contributions of your non-highly compensated employees. If you have to refund contributions, affected employees may fall behind on their retirement savings—and that money may be subject to state and federal taxes! If you don’t correct the issue in a timely manner, there could also be a 10% penalty fee and other serious consequences. Failing these tests, in other words, can be a real pain in the pocketbook. Safe Harbor may make sense for you if … Every company is different, but here’s a list of employer characteristics that tend to align best with the plan type. Your staff count is in the dozens, not hundreds. Not all small businesses are created equal. In general, however, the smaller your staff count, the more likely it is that the 401(k) contributions of high earners could outweigh those of their lower-compensated peers. If that happens under a Traditional 401(k) plan, you’re at a higher risk of failing nondiscrimination testing. Your staff includes a high percentage of part-time and/or seasonal employees. For companies with more fluid staff makeups, the same elevated risk of failing nondiscrimination testing applies. These types of workers are typically allowed to participate in plans yet often don’t contribute, thus negatively impacting testing. Your company has previously failed ADP or ACP compliance tests. This one’s a no-brainer. If Traditional 401(k) plans have given you testing fits in recent years, switching to a Safe Harbor plan could help avoid these costly tripups. Your company’s previous plans have been deemed “top-heavy.” Similar to the above, if you haven’t recently failed an ADP or ACP test as part of a Traditional 401(k) plan, but your plan was deemed “top-heavy,” you may have a higher risk of failing in the future. Your company has consistent and adequate cash flow. Safe Harbor 401(k) plans offer employees a pretty sweet deal. The company kicks in a minimum of 3-4% of their salaries, either contingent on a matching contribution or not (see: nonelective). That money vests immediately, too, which means employees can quit tomorrow and keep it. This commitment to your workforce’s retirement savings is the key cost consideration of Safe Harbor plans. It’s why we typically don’t recommend them for companies with less predictable cash flow year-over-year.  You’d rather avoid administrative burdens. Take it from us: even successful compliance testing can be a hassle. And failures? They can lead not only to the aforementioned penalties but to uncomfortable conversations with impacted employees. They’ll need explanations for why their contributions are being returned, and they ultimately may not be able to maximize their 401(k). If you prefer peace-of-mind over these compliance worries, consider the Safe Harbor option. Safe Harbor setup deadlines If you’re strongly considering setting up a Safe Harbor plan or adding a Safe Harbor contribution to your existing plan, here are a few key deadlines you need to know: Starting a new plan For calendar year plans, October 1 is the final deadline for starting a new Safe Harbor 401(k) plan. But don’t cut it too close—you’re required to notify your employees 30 days before the plan starts—and you’ll likely need to talk to your plan provider before that. If we’re fortunate enough to serve in that role for you, that means we’ll need to sign a service agreement by August 1. Adding Safe Harbor to an existing plan If you want to add a Safe Harbor match provision to your current plan, you can include a plan amendment that goes into effect January 1 so long as employees receive notice at least 30 days prior. At Betterment, the deadline for you to request this amendment is October 31.  Thanks to the SECURE Act, plans that want to become a nonelective Safe Harbor plan—meaning the employer contributes regardless of whether the employee does—have newfound flexibility. An existing plan can implement a 3% nonelective Safe Harbor provision for the current plan year if amended 30 days before the close of the plan year. Plans that decide to implement a nonelective Safe Harbor contribution of 4% or more have until the end of the following year in which the plan will become a Safe Harbor. Communicating with employees Every year, eligible employees need to be notified about their rights and obligations under your Safe Harbor plan (except for those with nonelective contributions, as noted above). The IRS requires notice be given between 30-90 days before the beginning of the plan year. What Betterment at Work brings to your Safe Harbor 401(k) setup An experienced plan provider like Betterment at Work can bring a lot to the table: Smooth onboarding | We guide you through each step of the onboarding process so you can start your plan quickly and easily. Simple administration | Our intuitive tech and helpful team keep you informed of what you need to do, when you need to do it. Affordability | We’re fully transparent about our pricing so no surprises await you or your employees. Investing choice | Give your employees access to a variety of low-cost, expert-built portfolios. Ready to get started – or simply get more of your questions answered? Reach out today. Or keep reading to learn more about whether a Qualified Automatic Contribution Arrangement (QACA) – i.e. auto-enrollment – is right for your Safe Harbor plan.

What state-mandated plans could mean for your small business Increasingly, states are requiring that businesses provide retirement plans to employees. Learn if you may need to enroll in one of these state-mandated plans. State-mandated retirement plans are on the rise due to local and state legislation requiring businesses to provide retirement benefits to their employees. With the growing number of private workers not having access to these crucial benefits, many states decided they had to act. In 2015, the Department of Labor (DOL) issued guidance to support the states effort to help promote retirement benefits within their respective states. What are state-mandated retirement plans? When we talk about “state-mandated plans,” what we mean is that, increasingly, more and more states have passed legislation that require businesses to provide retirement benefits for their employees. In these states, the employer has the option of enrolling their employees in the state-sponsored program or sponsor their own workplace retirement plan offered by providers like Betterment. A state-sponsored plan is typically an individual Retirement Account (IRA) in which the employer sets up for their participants to contribute. Certain features may differ between states so it’s a good idea to check in with your state's specific program. Is a state-mandated retirement plan required for my company and what is the deadline to register? Legislation is continuously being updated for each respective state and new states are emerging with future plans to offer this. To date, we’ve tried to provide resources as enough information becomes available on Betterment’s website. You can find more details on states like California, New York, Oregon and Illinois at the links provided. In most states, the mandate only applies if an employer meets certain criteria, such as having been in business for at least 2 years and having greater than 9 employees, as an example. If you have questions, it’s best to reach out to a representative of your state directly or consult your state’s retirement website (if applicable). That said, a state-mandated plan might not be the best plan for your business. Read on to learn more of the pros and cons. What are the benefits of a state-mandated retirement program? Registration to the program can be relatively quick They have limited employer responsibilities & fees No fiduciary responsibility for the employer Participants gain access to retirement benefits for a modest fee Automatic features can force savings (from which employees can opt out) What are the downsides of a state-mandated retirement program? Deferral limits are much lower than 401(k) plans Employees not able to defer taxes if state plan only utilizes Roth May offer limited financial wellness tools compared to 401(k) providers like Betterment May not be as flexible compared to a 401(k) plan Program may not be as competitive with other retirement vehicles for talent acquisition Missed deadlines can cause penalties to the employer Overall, state-mandated programs are a good push to increase the overall percentage of workers who have access to retirement benefits. As of 2021, 32% of private industry workers do not have any access to retirement benefits. If you are or will be required to offer your employees retirement benefits as a result of a state mandate, please know that you have options in setting up your company’s retirement plan and we are here to help. So, what should I do? For any employer who is concerned with attracting and retaining talent in today’s market, offering a 401(k) has become a table stakes benefit. At the end of the day, state mandated plans are designed to help employees save for retirement, but they may lack some of the benefits that offering a 401(k) plan affords. In order to compete for talent, but also to benefit your business’s bottom line with tax savings, we recommend thinking about designing a more thoughtful retirement option that will help you and your employees in the long run. Want to talk about how? Get in touch.