Since the Pension Protection Act (PPA) was passed in 2006, automatic enrollment in plans including 403(b) and governmental 457(b) has been an issue of consideration for plan sponsors. A number of states have also passed legislation permitting automatic enrollment and automatic escalation, some in the form of “auto-IRAs” and others regarding state plans and/or plans adopted by individual plan sponsors.
More recently, provisions in proposed legislation — specifically SECURE Act 2.0 — also include automatic enrollment and automatic escalation provisions, as described in more detail later in this article.
The PPA provisions made it clear that, if a plan is a non-ERISA plan, automatic enrollment could be added to the plan only if there were no laws in the applicable state which restrict automatic contributions. PPA actually amended ERISA to enable ERISA plans to adopt automatic enrollment regardless of any applicable state laws. The NTSA site contains an article by Linda Segal Blinn which explains these provisions quite well. Check it out through this link:
https://www.ntsa-net.org/breaking-down-barriers-non-erisa-automatic-enrollment
In 2015, the Protecting Americans from Tax Hikes (PATH) Act contained a provision for Church Plans (including Qualified Church Controlled Organizations and non-Qualified Church Organizations) that permitted auto enrollment which preempted any state laws. There have been rumblings over the years and even proposals to extend this to other nonERISA plans, but sadly that has not happened yet.
Assuming there are no state restrictions on adding automatic enrollment to the plan, let’s consider the benefits:
- Participation in a plan by eligible employees would likely increase, thus enhancing their retirement savings, since procedures to try to get the employees to enroll would be eased.
- The tax deferral aspect would be a benefit for those employees who do not opt out of automatic enrollment.
- If an automatic escalation feature is also added to the plan, the retirement savings for those employees will be further enhanced, since they would not need to go through administrative procedures to increase their salary deferrals. Note: This feature can be implemented in schools by the advisor even if auto enrollment is not permitted in that state, by the Advisor getting a signature from their clients implementing the escalation feature in the future.
- The employees still have the choice to opt out of deferrals to the plan or to contribute a different percentage than that applicable to the automatic enrollment and automatic escalation terms of the plan.
Of course, there are aspects to be considered before adding these features to the plan:
- The plan sponsor will need to amend its plan, or adopt a new plan, to provide the automatic enrollment and, if applicable, automatic escalation features.
- Notices need to be developed and issued to employees explaining the features and the process needed if the employee wishes to opt out or to choose a different deferral percentage that that specified in the automatic aspects.
- Recordkeeping procedures will need to be developed to track the automatic features that apply to each plan participant and those features which must be different for the employees who opt out or choose a different deferral percentage.
- If the 403(b) plan sponsor is a non-governmental 501(c)(3) entity and the plan currently meets the DOL rules to avoid being an ERISA plan, the addition of automatic enrollment will likely make the plan become subject to ERISA. This is because of the current DOL rules that a plan must be completely voluntary for employees, otherwise the plan sponsor actions would make it an ERISA plan. (See U.S. Department of Labor Field Assistance Bulletin No. 2010-01.)
Typically automatic enrollment includes the use of a default investment option/investment provider (note that this must be a group annuity contract or a group custodial agreement, where the Employer and the vendor are the only parties to the contract), into which the employee deferrals will be made, unless the employee specifically chooses other investment options or another investment provider; thus the plan sponsor’s choice of the default option and provider, as well as the designated deferral percentage, means the participation aspects are not completely voluntary. The NTSA has in fact communicated with the DOL on these issues, requesting amendments to the ERISA safe harbors; as of this writing, this has not yet been finalized.
Financial advisors have a clear opportunity here, to work with plan sponsors who are considering the addition of the automatic enrollment and/or automatic escalation to their plans, as well as with the employees to help them understand the implications of the automatic features and what their options are. Advisors also need to be aware of any applicable state rules which have been adopted with respect to state run automatic IRAs or governmental plans which could have an impact on the adoption of automatic features in the individual employers’ plans.
NTSA has published in the past an “Automatic Enrollment Guide”; a “Best Practices Guide” and a “403(b) Plan Enhancement Guide.” Some of these are in the process of being updated, so please visit the website for posted updates.
The current 403(b) Plan Enhancement Guide can be found here: https://www.ntsa-net.org/system/files/Guide%20-%20NTSA%20-%20403%28b%29%20Plan%20Enhancement%20Guide%20-%20%282019%29%20-%20v2.pdf
As mentioned earlier, current legislation has been proposed in the House and Senate which we expect to be passed as the SECURE Act 2.0. The proposals include provisions applicable to automatic enrollment and automatic escalation. One such provision would require newly established 403(b) and 401(k) plans to automatically enroll eligible employees with at least a 3% contribution rate and to increase the rate through automatic escalation by 1% per year until it reaches 10%. Eligible employees would have the option to opt out or to elect a different percentage. Exceptions may include a plan which was established prior to the Act’s enactment date as well as governmental plans and church plans. We will continue to monitor the progression toward enactment and will issue a notice as to its provisions.
Edie Russo is a Consultant with Equitable.
Opinions expressed are those of the author, and do not necessarily reflect the views of the NTSA or its members.
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