Inertia can be a powerful force, particularly for those wondering whether to enroll in their employer’s 401(k) retirement plan. It may explain why nearly one-quarter of workers eligible to participate in a 401(k) plan are not enrolled, even though many could be receiving matching contributions from their companies.

Provisions in the Pension Protection Act of 2006, signed into law earlier this year, make it easier for companies to enroll new workers automatically while providing safeguards that they won’t be sued over an inadequate plan

“The bottom line is, a lot of people just need help getting started, and automatic enrollment is a great way to get started,” said Gregory Burrows, vice president of retirement and investor services for Principal Financial Group Inc., one of the largest 401(k) administrators in the country.

With automatic enrollment, “the individual employee maintains the right to opt out, but what you see happening is fewer people opt out because inertia is now working for the benefit of the individual, rather than against the benefit of the individual,” Burrows said.

With the greater emphasis on worker savings, financial services companies are continuing to introduce “do-it-for-me” products to minimize the number of decisions employees must make. At the same time, they’re looking to tap into the estimated 71 million workers whose employers do not offer defined contribution plans, particularly small businesses.

Last year, Principal saw a 66 percent increase in the number of plan sponsors that provided automatic enrollment compared with 2004. Approximately 500 plan sponsors served by Principal now automatically enroll their employees, Burrows said. And according to an annual survey of more than 1,100 defined contribution plans by the Profit Sharing/401(k) Council of America, nearly 17 percent of the plans surveyed automatically enrolled employees in 2005, up from 10.5 percent in 2004.

Principal has found that plans offering the feature average a 6 percent higher participation rate. Additionally, in a survey Principal conducted of non-enrolled workers last year, two-thirds indicated they would likely stay in their employers’ plan if they were automatically enrolled.

Under the Pension Protection Act’s “safe harbor” guidelines for 401(k) plans that go into effect in 2008, plans that meet certain minimum matching, vesting and contribution escalation requirements will no longer be subject to annual testing otherwise required under Internal Revenue Service rules designed to ensure that the plans don’t overly favor highly compensated employees.

Those minimum provisions on automatic enrollments, effective in 2008, are:

– A first-year employee contribution of 3 percent of compensation, increasing to 6 percent over four years.   –   – Minimum employer contribution of 100 percent of employee’s contribution on the first 1 percent of compensation and 50 percent on the next 5 percent, or, alternatively, a non-matching contribution equal to 3 percent of compensation for all non-highly-compensated employees.   –    “What’s really good for employers now is that there’s a lot of clarity around what an automatic 401(k) safe harbor plan provision looks like, and they now have comfort that if they meet those guidelines, they’ll meet their fiduciary requirements,” Burrows said. “I think overall the market is excited about it, the plan sponsors are excited about it, and we think it’s a good thing for employees of our clients and future clients.”

According to the Profit Sharing Council’s survey, automatic 401(k) enrollment is most common among large plans. Thirty-four percent of plans with 5,000 or more participants reported having automatic enrollment, compared with just 3.5 percent of plans with fewer than 50 participants.

Burrows said it should be possible for many small companies to meet the safe harbor provisions with their plans.

“I think it really depends on where they are (with their plan) today,” he said. “We have several clients who today are making matching contributions that would meet the safe harbor provisions. I think they’re set intentionally at a level where they can serve the majority of employers and employees.”

At the same time, “the automatic enrollment features aren’t appropriate for all situations,” he said. “There are certain industry sectors that may have seasonal employment or high turnover rates built into their business, for which it just may not be the right solution.”

West Des Moines-based ITAGroup Inc., whose plan is administered by Principal, is among the companies that are considering automatic enrollment.

“One of the reasons we’re not jumping on board right away is that we already have a high enrollment rate – 93 percent,” said Dick Rue, ITAGroup’s senior vice president and chief financial officer. “What you have to look at is the administrative costs of doing it. If you’re automatically enrolling them, then you may have to disenroll them.”

Rue attributed the high enrollment rate to the company’s generous match: 100 percent of the first 3 percent of employee contributions and 50 percent of the next 2 percent. “That’s keeping in mind we also have an employee stock ownership plan on top of that,” he said. On average, ITAGroup employees defer 8 percent of their salaries, Rue said.

“I guess what a company really has to decide is, how parental do they really want to be to their employees? If we have 7 percent who don’t want to participate, how much do we want to try to force them? We respect our employees and their ability to make those decisions. That’s probably where our decision point teeters just a little bit. Nobody likes to be told what to do, especially when it’s their own personal moneys.”