Auto-enrollment: Friend or Foe to Plan Sponsors?
Auto-enrollment features for retirement plans: friend or foe? Let’s talk about what’s available and why they may be worth considering for your plan.
What does auto-enrollment do for your plan?
No retirement plan enrollment discussion is complete without INERTIA. The more you want to ensure someone does not take action, the more roadblocks you should put in front of them! If it’s too hard, no action will be taken. This is the case with retirement plan enrollment. While employees are well-meaning and intend on enrolling, that enrollment form is likely to end up under a stack of other papers, never to be touched again. And, unlike any other benefit offered, employees can enroll any time after they’re eligible, so there’s always tomorrow to get around to it!
Not starting early (or not starting at all) in saving for retirement can have a dramatic impact on an employee’s eventual retirement options and lifestyle. Auto-enrollment flips the outcome of inertia by forcing employees to take action to opt-out, rather than to opt-in. In other words, employees will automatically default into contributing to the plan at pre-determined rates. This nudge puts employees on the right path of saving for retirement.
If you have testing problems and have already tried educating employees into the plan to help raise deferral rates with no success, auto-enrollment can often help increase the average deferral rates. Everyone likes a healthy plan, and the ability to save what they’d like to!
So far, auto-enrollment is very much our friend. Keep reading.
What are the different types of auto-election options?
Currently, there are two main ways of establishing an auto-enrollment provision in a plan: The a la carte option or the pre-packaged deal. (FYI, you can refer to the IRS website for more info on both of these.)
A la carte: Choose when and at what percentage you want to auto-enroll employees at and then decide if you want that amount to increase automatically in the future or not.
This option also allows maximum flexibility for adopting certain provisions without having to adhere to others.
The pre-packaged deal comes in two main forms: The Eligible Automatic Contribution Arrangement (EACA) and the Qualified Automatic Contribution Arrangement (QACA).
a. EACA – This is the “Give me my money back! I forgot to opt-out!” option. First, after meeting eligibility requirements, give employees notice of upcoming enrollment (30-90 days) with the chance to opt-out. Then, the EACA allows employees a certain amount of time in which they can reverse the auto-enrollment function and get their money refunded.
b. QACA - The QACA is the Safe Harbor version of the auto-enrollment packages, allowing the plan to dodge annual nondiscrimination tests. A major advantage to using the QACA safe harbor package is that the match or non-elective contribution can carry a vesting schedule; employees must be 100% vested at 2 years of service rather than right away. The plan must enroll employees at a minimum 3% and then increase it to 6%. (Or, avoid the escalation feature by enrolling employees at 6%.) For employer contributions, option A is a 100% match of employee contributions up to 1% of compensation and a 50% match of contributions above 1% and up to 6%. (Meaning, if they contribute 6%, they get 3.5% from the employer.) Option B requires a non-elective contribution of 3% of compensation to all participants.
Where’s the downside?
Once automatic enrollment is in place, the plan administrator must ensure the compliance requirements are met. There are notice requirements, and if someone isn’t automatically enrolled when they should be, there are penalties and fees due! This begs the question of how the enrollment sequence will be initiated and tracked throughout the process. For organizations with robust HR platforms and integrated payroll, the additional administration may be minimal. For the others, things may not be so simple. In either case, the plan sponsor must take a serious look to determine if the increase in administrative duties is worth the benefit.
Depending on the level of coordination (technologically or otherwise) between a company’s payroll system, the administrator, and the recordkeeping system, how the process is performed ranges from manually at the plan sponsor level to automatically at the recordkeeping level.
Let’s look at the sequence of events that is kicked off when a new person is hired:
The payroll has to either track all hiring dates and eligibility information to trigger the enrollment or communicate the data to the recordkeeper for tracking
The employee has to receive a notice that the auto-enrollment is approaching, 30-90 days in advance. Either the plan sponsor, TPA, or recordkeeper has to send that notice – electronically or on paper, and will need the appropriate address.
The participant needs to make an election (or not) in the payroll or recordkeeping system once they receive the notice.
The election information (either the default percentage or the one the employee actively selected) has to be reported to/recorded in the payroll system. That notification could come from the recordkeeper collecting it and sending it to the payroll person, or it might be automatic, or it may come the other direction from the payroll system and be communicated to the recordkeeper.
Money has to be withheld, deposited on time, and communicated to the employee’s account at the recordkeeper.
If you’re using auto-escalation, either the payroll or the recordkeeping system must continue to track when the next escalation will happen.
You can see how technology could really help here and you can see how easily this process can break down if it’s not set up well!
So, what do we really think? Friend or foe?
Whether the auto-enrollment features are part of a robust wellness offering or a mechanism to move a plan closer to passing annual testing, there is a lot of good that can come from its implementation. Every opportunity we have to move participants toward a more successful retirement is worth exploration. Just remember, there will be some setup work required to build processes around the auto-enrollment to keep the plan compliant.
Is auto-enrollment the only tool you have to get participants on the right track? Oh, heavens, no! Plan design and language around enrolling make such an important impact that they need to be examined with your particular employees in mind to build successful outcomes. You have a lot of ways to make the plan work with your population.
Need help thinking through this decision or need suggestions on how others have managed this operationally? Reach out and book a call. We’re happy to help!