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My company is changing 401K providers. I know I must rollover my funds from the original co. to the new 401K provider, but I did not want to contribute any additional monthly monies to the new plan.

Yesterday I was told that I must contribute 1% and that it would be taken out of my paycheck regardless. Can they do this? Is this legal?

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I believe that the employee has to voluntarily request (by signing a salary reduction agreement) that the employer reduce the salary paid to the employee by x% and put that x% money into the 401k plan as an employee contribution (usually matched up to y% by the employer as an employer contribution). I don't know that an employer can force an employee to participate ... but, the laws may well have changed since the last time I thought about the matter. As Mark Twain said and as US Federal employees are discovering, "No man's life or liberty is safe while Congress is in session." –  Dilip Sarwate Feb 17 '12 at 13:30
A new plan may have a 1% default, but you should be able to go in and change it. Does the plan have matching? If it does, depositing up the match is highly recommended. –  JoeTaxpayer Feb 17 '12 at 19:50
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1 Answer

Are you sure you are getting the story straight?

Much of the discussion and perhaps even the wording of the law is somewhat confusing in the way it uses the word "mandatory". Recent changes allowed companies to auto-enroll employees in 401K plans, unless they pro-actively opt out. To me the word "mandatory" means that you have to contribute, and a lot of people are using the term in reference to these plans, but I think that isn't an accurate way of describing what is going on.

I'd ask your HR people if there is an opt-out clause. I'm betting there is one.

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You are right; the recent rule changes allow companies to auto-enroll employees since Congress was concerned that many people don't contribute to 401k plans even though it is likely to be in their best interest to do so. But as you say, there is likely an opt-out clause so that an employee has to proactively refuse to participate (that piece of paper will be in HR files forever!). Previously many employees did not participate because they felt the whole thing was too confusing to figure out, and the default option was easy: Just Say No. –  Dilip Sarwate Feb 17 '12 at 17:59
They can try to force you back in once a year. Though I don't know how many will do that. It may be that they wanted to take advantage of the investment company switch to try to get all the people into the program –  mhoran_psprep Feb 17 '12 at 20:25
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