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Finance Best Practices
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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 con-
siderable 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 that they will want to take out loans against their invested funds, each
of which calls for more paperwork.

Cost: Installation time:

11–13 GRANT EMPLOYEES IMMEDIATE 401(K) ELIGIBILITY
The most common way to enroll employees into a company’s 401(k) pension
plan is to make them wait either 90 days or a year from the date of hire. This calls
for the maintenance of a list of dates for newly hired employees that must be
watched to ascertain when someone become available for this benefit. Then they
must be contacted and scheduled for a short lecture about how the plan works and
how to invest in it. Then they complete paperwork to enroll, which is forwarded
to the payroll department so that deductions can be made from their paychecks
for advancement to the 401(k) plan administrator. All of the steps can more easily
be compressed into the hiring process, as was just noted in the “Automate 401(k)
Plan Enrollment” section in this chapter. However, the issue can be taken one
step further by not only completing all of the paperwork at the time of hire, but
also by actually allowing immediate participation in the plan at the time of hire.
This represents less a matter of improved efficiency than of giving new employ-
ees a fine new benefit, for they can begin investing funds at once, which may lead
to a reduced level of employee turnover.
The main problem with this best practice is that new employees can impact a
company’s ability to pass pension plan nondiscrimination tests, especially if the
new hires are at low pay scales. If these new employees do not invest a reason-