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401(k) Plans—Auto-Enroll, Auto-Escalate—

What and How You Can Do It!

Employee Benefits Symposium

Rosewood Hall, SoHo

Birmingham, Alabama

August 22, 2013

Donna Cornwell, O’Neal Steel

B. David Joffe, Bradley Arant Boult Cummings LLP

Gordon Earle Nichols, Bradley Arant Boult Cummings LLP

© 2013 Bradley Arant Boult Cummings LLP 2

Introduction: Why an Employer Should Consider Auto-

Enrollment and Auto-Escalation Features in its 401(k) Plan

If auto-enrollment features result in a higher actual deferral percentage (“ADP”)

for the Non-Highly Compensated Employees (“NHCEs”) in the 401(k) plan, it will

either cause the plan to pass the nondiscrimination test or, if not, to reduce the

amount involved in any correction necessary to satisfy such test.

In certain cases, the use of both auto-enrollment and auto-escalation features

will allow the 401(k) plan to satisfy the nondiscrimination test, regardless of the

ADP of the NHCEs.

As a result, every employer with a 401(k) plan that has difficulty satisfying the

nondiscrimination test should consider auto-enrollment and auto-escalation.

However, there are a number of other factors that should be considered before

the addition of such features.

For example…

Technically, Auto-Enrollment and Auto-Escalation Features

Help a 401(k) Plan satisfy the Code Section 401(k)(3)(C)

Nondiscrimination Test




On a National Scale, the savings rate is as low as it has

been since the Great Depression.




The U.S. personal savings rate is also much lower

than it was in the 1970s and 1980s.

Source: nerdwallet.com




The are a number of academic studies that forecast

a large percentage of the population “at risk”

for having inadequate retirement income.




And some other studies which demonstrate that,

with auto-enrollment and auto-escalation, the amount of

projected retirement savings increases dramatically!




These studies provide strong evidence of the power of

Newton’s First Law of Motion (aka Inertia): Every object in

a state of uniform motion tends to remain in that state of

motion unless an external force is applied to it.

TWO VISUAL IMAGES OF INERTIA:

1. A hammer and a nail




These studies provide strong evidence of the power of

Newton’s First Law of Motion (aka Inertia): Every object in

a state of uniform motion tends to remain in that state of

motion unless an external force is applied to it.

TWO VISUAL IMAGES OF INERTIA:

2. An example that might better resemble the concept when

applied to 401(k) Plan participants:




Auto-enrollment and auto-escalation features in 401(k)

plans attempt to take advantage of Newton’s Law and help

participants be better prepared for retirement.

Our Panelists today:

David Joffe - Who will discuss the “fine print” of auto-

enrollment and auto-escalation features in 401(k) plans.

Donna Cornwell – Who will present a case study

regarding the implementation of auto-enrollment and

auto-escalation features in the O’Neal Steel, Inc. 401(k)

Plan.


The Fine Print: The Technical Requirements of Auto-

Enrollment and Auto-Escalation Features

A (Very) Brief History of IRS Guidance

Prior to 2000: Several Internal Revenue Service (“IRS”) Private

Letter Rulings approved various automatic enrollment

arrangements in a somewhat piecemeal fashion.

Revenue Ruling 2000-8:

Affirmed that an auto-enrollment feature which imposed

an automatic 3% deferral election (with the option to opt-

out) was a cash-or-deferred election under Code Section

401(k).

The arrangement described in the ruling provided notice

to the employees that explained automatic enrollment and

the employees’ right to revoke or modify their elections.




• In 2004, in informal guidance, the IRS specified a number

of other provisions that needed to be in any automatic

enrollment arrangement.

• Also, in 2004, the IRS issued revised final regulations

under Code Section 401(k) which approved “any direct or

indirect election” as a permissible deferral election. The

preamble also clarified that a 3% automatic contribution

rate was merely illustrative.

A (Very) Brief History of IRS Guidance




The New Framework under the

Pension Protection Act of 2006




The Pension Protection Act of 2006 (“PPA”) created a new

framework and new terminology for auto-enrollment, auto-

escalation, and default investments:

ACA = Automatic Contribution Arrangement

EACA = Eligible Automatic Contribution Arrangement

QACA = Qualified Automatic Contribution

Arrangement

QDIA = Qualified Default Investment Alternative

The New Framework under the

Pension Protection Act of 2006




ERISA Section 514(e):

Provides specific preemption of state wage-

withholding laws for ACAs.

Applies to 401(k) plans but also any ERISA pension

plan with employee elective contributions.

ACA Requirements:

Plan must specify a uniform percentage of

compensation.

A qualified default investment alternative (“QDIA”)

may be used.

Generally, requires advance notice “within a

reasonable period before [each] plan year” (= at

least 30 days before the plan year).

Automatic Contribution Arrangement (“ACA”)




Code Section 414(w):

Provides for eligible automatic contribution

arrangements (“EACAs”) that permit withdrawals

within the first 90 days.

Applies to 401(k), 403(b), and governmental 457(b)

plans as well as SARSEPs and SIMPLE IRAs.

Requires a uniform percentage (like ACAs).

Advance Notice Requirements

Pre-Eligibility: Not more than 90 days before

eligibility.

Annual: At least 30 but no more than 90 days

before the plan year.

Eligible Automatic Contributions Arrangement (“EACA”)




Code Section 414(w):

Requirements for optional permissive withdrawals:

Permitted within 90 days of initial deferral.

Adjusted for gains & losses to date of distribution.

Distributions included in taxable income (unless

Roth) but no 10% early withdrawal penalty.

Any matching contribution is forfeited.

Eligible Automatic Contribution Arrangement (“EACA”)




Not a QACA.




Code Section 401(k)(13):

Provides for QACAs for 401(k) plans only.

Combines automatic enrollment with automatic

escalation.

An affirmative election stops automatic enrollment

and automatic escalation.

Provides an alternative “safe harbor” for purposes of

satisfying the ADP nondiscrimination test.

Several requirements . . . .

Qualified Automatic Contribution Arrangement (“QACA”)





• Automatic Contribution Requirement

Initial deferral percentage of at least 3% (applies

when the first contribution is made until the last day

of the following plan year).

Contribution increases each plan year thereafter until

it reaches 6%.

Current employees eligible prior to QACA with an

election (even 0%) can be excluded from automatic

enrollment.

Plan is permitted to have higher percentages up to

10%.






• Uniform Percentage Requirement

But can vary based on number of years of service.

A higher rate prior to QACA does not have to be

reduced.

Automatic contributions are suspended for 6 months

following a hardship distribution.






• Required “safe harbor” employer contributions:

Matching contribution: 100% of the first 1% of

Compensation, plus 50% of the next 5% of

Compensation (= 3.5% maximum), OR

Non-elective Contribution: 3% of Compensation.

Must be fully vested after no more than two Years of

Service.

Only required to be made for NHCEs.






Notice and Effective Date Requirements

Initial notice must be provided early enough so

that employee has a reasonable period of time

after receipt of notice to make elections to opt out

and to determine investment allocations.

Automatic enrollment must be effective no later

than the second pay date after the initial notice is

provided or, if earlier, the first pay date that

occurs at least 30 days after the notice is

provided.

Annual notice must be provided a reasonable

period before plan year (generally, at least 30, no

more than 90 days before the plan year).






Plan terms must provide for QACA

May include EACA

May use a QDIA

ERISA Section 404(c)(5) provides significant

fiduciary protection for automatic enrollment

because participants are treated as exercising

control despite automatic enrollment.

QDIAs are STRONGLY RECOMMENDED for

fiduciary protection.

QDIAs are subject to several requirements

regarding permitted investment options and

notices.





Comparison to ADP Nondiscrimination Safe Harbor

Traditional safe harbor does not require automatic

enrollment.

Traditional safe harbor and QACA both have 3%

nonelective contribution options.

Traditional safe harbor is 100% of the first 3% plus

50% on the next 2% (maximum of 4%); QACA is 100%

of first 1% plus 50% of next 5% (maximum 3.5%).

Overall QACA matching contribution could be

greater depending on opt out group

Run numbers to project/compare the safe harbors

Traditional safe harbor has immediate vesting; QACA

has 2-year cliff vesting.

QACA v. Traditional Safe Harbor




• Auto-Enrollment and Auto-Escalation may result in

operational failures.

Failure to automatically enroll an eligible employee.

Failure to increase contributions under an auto-

escalation feature.

• Operational failures can be addressed under EPCRS.

Generally, a qualified nonelective contribution

(“QNEC”) is required based on 50% of missed deferral

amount.

Corrective contributions are also required for 100% of

the missed matching or nonelective contribution.

Self-Correction Program available for a limited period;

otherwise, use Voluntary Compliance Program.

Employee Plans Compliance Resolution System (“EPCRS”)




ACA = Automatic Contribution Arrangement

ADP = Actual Deferral Percentage

Code = Internal Revenue Code

EACA = Eligible Automatic Contribution Arrangement

EPCRS = Employee Plans Compliance Resolution System

IRS = Internal Revenue Service

NHCE = Non-highly Compensated Employee

QACA = Qualified Automatic Contribution Arrangement

QDIA = Qualified Default Investment Alternative

PPA = Pension Protection Act of 2006

SARSEP = Salary Reduction Simplified Employee Pension Plan

SIMPLE IRA = Savings Incentive Match Plan

VCP = Voluntary Compliance Program

Glossary

27

Case Study: The Implementation of Auto-Enrollment

and Auto-Escalation Features in the O’Neal Steel,

Inc. 401(k) Plan

Donna Cornwell

Human Resource Manager

O’Neal Industries, Inc.

Birmingham, Alabama

Founded in 1921

Corporate office in Birmingham, 3rd generation

leadership

93 locations - 3,000 US employees and 500

international

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O’Neal – a family of companies

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O’Neal Industries

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Retirement Plan History

In the beginning….

• O’Neal offered a defined benefit pension plan to O’Neal Steel

employees until 2008

• O’Neal offers a 401(k) plan to all employees – in all companies

• Also, a Non-Qualified Deferred Compensation program to select

Executives and Management team members

33

Fast forward . . .– Pension Plan frozen to new and acquired employees

• Benefit calculation modification

• Benefit restriction

• Hard freeze March 31, 2013

– 401(k) – annual Non-Discrimination Testing issues

– NQDC Plan – limited participation

What were we doing about it?- Retirement Committee review of all plans on a continuous basis

- 401(k) – defining opportunities and the tools necessary to help employees understand the value and need of saving to meet financial goals, and ultimately, have sufficient savings for retirement

- Ensure fund offering was in alignment with efficient growth opportunities at reasonable cost to the employee and the plan

Retirement Plan History

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O’Neal believes that it is essential to weave financial health and

well-being into the Culture of our Organization

Communication

Integrate benefit plan design & workplace

environment

Key Factors of Engagement

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Alignment: Strategy, Metrics, Goals

2012 2013 / 2014March 2007

• Participation and Engagement

– Auto enrollment for new hires

• 401k Education

– Increase onsite meeting schedules

– Employee advice

– One-on-one counseling

• Measure changes in saving patterns

– Increase in enrollment

– Employees becoming proactive in 401(k) account management

• Bring other programs into the mix

– HDHP implementation with company contribution ($900/$2100/$3000 year)

• Implement QACA Safe Harbor 401(k) Plan

• Financial Wellness Program

– Define saving readiness and need of multi-faceted education program

– First time savers

– Get the house in order

– Emphasis on one-on-one counseling and saving readiness

• Define metrics

– Impact on productivity, absenteeism, presenteeism

– Impact on bottom line

• Integration

– Tie to programs

– Make it the culture

July 2011

• Participation and Engagement

– Auto enrollment for all employees

– Auto increase for all employees

– Resolicitation on an annual basis

• Improve financial literacy

– Webinars

– Onsite meetings

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Key elements to a successful strategy

– Communication – management’s commitment and support

– One size doesn’t fit all – make it meaningful to the employee

– Don’t forget the price – how restructuring of retirement savings plans impact the

cost/budget of other benefit plans

Program elements

– Budgeting and debt management

– Emergency fund and short-term savings

– Income and asset protection

– Retirement and long-term savings

– Distribution and legacy planning

Building the Culture

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Goal

Offer a financial savings program that demonstrates the company’s commitment

to helping employees meet financial goals and have adequate savings for

retirement.

Program Components:

Auto enrollment and annual re-solicitation

Annual auto-increase

Company match: $1 for $1 on first 1% of contribution; $.50 / $1.00 on next 5%

Communication and Education

o Growing partnership with vendors

o Saving readiness

o Webinars and videos on demand

o Total Reward Statements

o Employee Assistance Program opportunities

2013 401(k) Plan: QACA Safe-Harbor

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Program must be multi-faceted, non-discriminatory and offer a variety of levels of education and

financial advice

Employees want to be told how much and how to invest: “Tell me what to do”

Employees want to be successful: “Help prepare me so I can save in my 401k and prepare for

retirement”

Communicate, communicate, communicate: keep the message simple, management must support all

communication platforms

Tie benefit programs together to help employees think about a bigger financial wellness picture

Don’t force the issue – 401k plan savers may not be ready to contribute, and will take out loans and

withdrawals with little hesitation

Continuously re-evaluate the education program’s structure, metrics, participation and engagement

Keep the message consistent

Lessons Learned

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elect

Current Participation: 95% with 6% average deferral rate

Strategies to Encourage

Employees to

Participate and Engage

Plan Design:

• Expand Auto enrollment from new hires to existing employees with 0% deferrals

• Increase Participants with 1% and 2% up to 6%

• Add Auto Increase Feature – each participant is increased by 1% per year until they cap out at match ceiling

Education Recommendations in conjunction with Plan Design Changes:

• Group and 1:1 meetings at all locations encouraging asset allocation, retirement planning, diversification, and advice.

• Posters, wallet cards, quarterly messaging, and targeted age appropriate investing.

Results

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For more information:

Donna Cornwell

O’Neal Industries, Inc.

Corporate Human Resources Manager

(205) 599-8549

[email protected]

Thank you

401(k) Plans—Auto-Enroll, Auto-Escalation—

What and How You Can Do It!

Employee Benefits Symposium

Rosewood Hall, SoHo

Birmingham, Alabama

August 22, 2013

Donna Cornwell, O’Neal Steel

B. David Joffe, Bradley Arant, Boult Cummings LLP

Gordon Earle Nichols, Bradley Arant, Boult Cummings LLP