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The Internal Revenue Service (IRS) and the President recently endorsed negative election programs, which require workers to be enrolled automatically in a 401(k) plan unless they specifically decline to participate. This is commonly known as the "McDonald's Election" since it was first implemented by the fast food giant.

The IRS' example follows:

Under Plan A, a newly hired employee is immediately eligible to participate in the plan. If the employee does not affirmatively elect to receive cash or have a specified amount contributed to the plan, his or her compensation is automatically reduced by 3% and this amount is contributed to the plan. An election not to make a salary reduction contribution or to contribute a different percentage of compensation can be made at any time.

At the time an employee is hired, the employee receives a notice of the following:
  • explanation of the automatic salary deferral election,
  • the employee's right to elect to have no salary deferral contributions made to the plan,
  • the employee's right to alter the amount of contributions,
  • the procedure for altering the amount of contribution.
The employee is subsequently notified annually of his or her salary deferral percentage and the employee's right to change the percentage.

The plan provides that both salary deferrals and matching contribution will be invested according to the employee's election. If the employee makes no election, the employer will automatically invest the employee's contributions in the trust's balanced fund, which includes both diversified equity and fixed income investments.

The Department of Labor has advised the Treasury and the Internal Revenue Service that, ERISA 404(c) relief will not be available when the employee is merely apprised of investments that will be made on his or her behalf in the absence of instructions to the contrary.

Basically, the employer needs to decide two items:
  1. the default percentage, and
  2. the default investment option.
It appears that the defaults outlined in the IRS' example would be the best place to start.

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