Encouraging more Americans to save into a defined contribution retirement plan – when one is offered at the workplace – is an important focus of both Congress and our government’s regulatory agencies. One method that has gained traction in recent years is the plan design strategy known as “automatic enrollment.” Traditionally, enrollment of newly eligible employees into a qualified workplace plan required the employee to make an affirmative election of his or her deferral amount. However, under an automatic enrollment structure, a new employee is enrolled at a specified deferral amount without having to take any action. That enrollment is effective unless the employee chooses another deferral level, or decides to opt out of the savings program altogether.
According to U.S. Treasury personnel and the General Accountability office (GAO), plans that utilize automatic enrollment average about a 90% participation rate. This is significantly higher than the average rate when traditional enrollment is employed. The question, then, is should your current or potential clients consider a change to automatic enrollment, which would also require them to update their plan document and summary plan description? Generally, the answer will be “yes” if the sponsor’s single objective is to increase the number of eligible employees deferring to the plan.
However, there are certain situations when an employer may not want to increase the number of contributors to the plan. These include:
- High turnover work environments – Companies that experience high turnover rates may not want to increase participation only to have the newly-enrolled employees terminate and require a distribution.
- Budget constraints on company matching – Increasing deferrals may increase the commitment for a matching contribution, and the plan sponsor may not be able to accommodate this contingency.
- Plan administration time and costs – Increasing the number of participants will increase plan administration time and associated costs.
A good adviser should be aware of these circumstances, to make sure they are raised and discussed with sponsors when evaluating the potential adoption of an automatic enrollment feature.
Keeping Informed on Auto-IRA
While incorporating automatic enrollment into existing plans can be a good first step to helping people prepare for retirement, the administration is also concerned about the estimated 75 million American workers who do not have access to an employer-sponsored savings plan at all. A possible answer to the “no access” problem may soon be on the way and it, too, features an automatic strategy. As mentioned both in the President’s 2010 State of the Union address and in the Annual Report of the White House Task Force on the Middle Class, the administration is looking into a system which, by law, would require employers that do not currently sponsor a qualified retirement plan to automatically enroll their employees in an IRA-based savings plan ("auto- IRA”).
Preliminary indications are that employers in existence for less than 2 years or with fewer than 10 employees would be exempt from this requirement. These “starter” plans would limit deferrals to no more than the applicable IRS contribution limitation for the year and would not offer (or require) any employer contributions. The goal is to start employees on the road to retirement savings on a payroll to payroll basis, since studies show they are more likely to save if offered a plan at the workplace.
As an adviser, why is this information important to you? Whether or not you want to be involved in implementing these arrangements for current or prospective clients, the topic of auto-IRA presents an opportunity for you to explain the basic obligations an employer might end up with under this framework. At a minimum, some of those appear to be the following:
- Communicating the plan to employees.
- Offering new employees the option to increase, decrease or opt out of the automatic deferrals.
- Segregating deferrals from wages and deposits to the plan.
- Engaging an institution to serve as a custodian of the assets.
- Providing employees with information and education about investment process and products.
If an employer is required to perform the above functions, they may very well be open to taking the next step, and considering a SIMPLE or qualified plan which provides greater benefits to them and their employees. Either way, they will be looking to you for more details and guidance if this proposal moves forward and does indeed become the law.
Robert M. Kaplan is Vice President and National Training Consultant for ING’s U.S. Retirement Services. In this role, he leverages his 30 years of experience in the retirement industry to help educate a variety of ING stakeholders on complex regulatory topics, plan design matters, administration and sales strategies. Robert is a member of various retirement services organizations and a frequent speaker at industry events, conferences, and meetings.
(This material was created to provide accurate information on the subjects covered. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. These materials are not intended to be used to avoid tax penalties, and were prepared to support the promotion or marketing of the matters addressed in this document. The taxpayer should seek advice from an independent tax adviser.)