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. Well-meaning employees just don’t take the myriad of steps to actually enroll in their retirement plan. (The more you want to ensure someone does not take action, the more roadblocks you should put in front of them!) Education meetings have also shown to have little impact on action. 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.) 

1. 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.

2. The pre-packaged deal comes in two main forms: The Eligible Automatic Contribution Arrangement (EACA) and the Qualified Automatic Contribution Arrangement (QACA).

• 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. The EACA allows the plan sponsor to reverse the auto-enrollment function with a certain time period to refund any upset employee’s contribution.
• 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, enroll at 6% to avoid the escalation feature.) 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. Whether your payroll and HR department is large or small, the plan sponsor must take a serious look at operations 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. Each part of the handoff and data exchange creates the chance for costly errors.

So, what do we really think? Friend or foe?

Whether the auto-enrollment features are a nudge, a 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 significant setup work required to build processes around the auto-enrollment to keep the plan compliant that may or may not create ongoing work. 

You can read the full-length article here.

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Courtenay Shipley, CRPS, AIF, CPFA has a diverse background in the retirement plan industry providing a unique foundation for her clients in the areas of fiduciary responsibility, investment analysis, and participant education. During her career she has provided institutional investment consulting to qualified retirement plans, developed business strategy for a boutique third party administrator and recordkeeper, conducted over 9,000 education meetings to groups and individual employees, and served the nonprofit market.

Courtenay is a graduate of Vanderbilt University, and is licensed as an investment advisor representative (Series 66). She holds the Accredited Investment Fiduciary? (AIF?) designation through the Center for Fiduciary Studies, the Chartered Retirement Plan Specialist (CRPS) designation from the American College of Financial Planning, the Certified Plan Fiduciary Advisor (CPFA) from National Association of Plan Advisors, and the Certified Health Savings Advisor (CHSA) designation. Since 2015 she has been featured in the Financial Times Top 401 Retirement Plan Advisors annual list, named a Top Women Advisor All-Star by the National Association of Plan Advisors (2015, 2017-2019), and named a 2018 NAPA Young Gun: Top 75 under 40. Click here for award descriptions and criteria.