If your company offers automatic 401(k) enrollment, you’re required to give employees a special notice prior to enrollment.
The notice must inform employees that they have the right to opt-out of the plan if they don’t want to participate. Additionally, they have the right to specify both the percentage of their salary that gets deducted for 401(k) contributions and the amounts allocated to the various investment choices in the plan.
The notice must also inform employees of what will happen if they don’t opt out or provide specific investment instructions: The company will set up a 401(k) account for each new enrollee, deduct a certain amount (3%, for example) of salary to be placed in the account, and place the money in the plan’s default investment choices (for instance, a balanced mutual fund).
Plan sponsors are required to provide this notice in a manner “calculated to be understood by the average plan participant.” In other words, write it in plain English. Avoid legal or investment language that can makes the notice confusing to the average employee.
Legally, this means it’s no longer acceptable to give employees a copy of your 401(k) plan documents or an investment prospectus from your 401(k) carrier. Employees must have a clear understanding of enrollment and opt-out procedures, salary deductions, vesting schedules, 401(k) investment choices and risks.
Checklist of required content in employee notices
Think of the notices as a thumbnail sketch of your 401(k) plan, written in non-technical language for the benefit of employees. The notices should:
- Explain that, unless the recipient chooses to opt out by the enrollment deadline date, he or she is automatically enrolled.
- List the automatic percentage of pay deducted for 401(k) investments. Remind the recipient of his or her right to choose to contribute at a different percentage.
- Explain the circumstances under which a participant’s money will be placed in a default investment. Remind recipients of their right to direct the investment of assets in their own accounts.
- Describe the default investment: its investment objectives (e.g., long-term growth), typical risk and return characteristics, plan fees and other expenses, and
- Direct employees to resources where they can get help or information about the plan’s other investment options.
