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Accounting Best Practices, Fifth Edition by Steven M. Bragg Englewood, Colorado

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11–14. Automate 401(k) Plan Enrollment

In smaller organizations, the accounting department is tasked with the management of 401(k) plan additions, changes, and deletions. This is not an efficient process, for someone must arrange for a meeting with each employee who has now been working for the minimum amount of time, as specified in the plan documentation, explain the plan’s features to them, wait for them to take the plan materials home for review, and, finally, enter the returned documents into the system of the 401(k) provider. This is a lengthy and time-consuming process.

An alternative is to automatically enroll employees in the 401(k) plan. This is also known as a “negative election,” since an employee must make a decision not to be enrolled in the plan, rather than the reverse. This approach has the considerable advantage of reducing the paperwork needed to enter a person into the 401(k) plan, since it is done as part of the hiring process, along with all other paperwork needed to set up a new employee.

There are only minor downsides to this best practice. With more employees in the plan, there will be somewhat higher fees charged by the 401(k) service provider (which are typically charged on a per-person basis). Also, there will still be some paperwork associated with those employees who do make a negative election. Finally, since the group of employees who tend to be added to the 401(k) plan through this method are at the lower end of the income stratum, it is more likely ...

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