“Implementing Automatic Features in Defined Contribution Plans: Answers to Frequently Asked Questions” was recently released by the Defined Contribution Institutional Investment Association (DCIIA). The aim of the paper is to review best practices for implementing automatic features in defined contribution (DC) plans and provide clarification about common regulatory questions that plan sponsors and their advisers may have when putting automatic plan features into practice.
The paper notes that the Pension Protection Act of 2006 (PPA) introduced multiple safe harbors for implementing automatic enrollment in DC plans such as: (1) a safe harbor for preemption of state anti-garnishment laws under the Employee Retirement Income Security Act (ERISA); (2) a safe harbor extending 404(c) protection under ERISA to automatic features; and (3) nondiscrimination testing safe harbors.
While helpful in providing comfort to plan sponsors seeking to implement automatic features such as automatic enrollment and automatic contribution escalation, DCIIA contends the introduction of these safe harbors also caused considerable confusion within the DC plan sponsor community. Specifically, this confusion may prevent sponsors from taking full advantage of automatic features and translate into implementation approaches that are unlikely to facilitate adequate income replacement by plan participants in retirement.
The paper covers topics including, but not limited to:
- Maximum limitations or requirements for automatic contribution escalation;
- Initial default contribution rates for automatic escalation programs;
- Tying an initial default contribution rate under an automatic enrollment program into a plan’s maximum matching contribution percentage; and
- Whether plan sponsors who previously implemented automatic enrollment programs are permitted to automatically re-enroll participants who previously opted out.
A copy of the current paper can be downloaded here.