Kristen Donovan, QKA, CPFARetirement Solutions Manager

BAM Advisor Services, Inc.kdonovan@bamadvisor.com

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Comparing Different Typesof Automatic Enrollment

Agenda

• Introduction

• History of Auto-Enrollment

• Types of Automatic Enrollment

• Re-enrollment and Auto-Escalation

• Trends and Best Practices

• Wrap Up

• Q&A

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Introduction – Start at the Beginning

• Industry shifted from Defined Benefit Plans to Defined

Contribution Plans

• Onus on participants to figure out how much to save and how

to invest – can’t simply rely on social security

• Participants not saving enough

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Education Isn’t Always Enough

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The Problem

• 68 percent of participants not at target savings rate

• 70 percent of participants are not confident about which

investments to choose

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JP Morgan 2016 Defined Contribution Plan Participant Survey

Human Behavior

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Organ donation – presumed consent

Human Behavior

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Behavioral Finance

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Auto Enrollment – The Answer?

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EBRI Study Results

Voluntary Enrollment for lowest quartile earners 0.08 x final earnings at 65

Auto Enrollment 4.96 or 5.33 x final earnings at 65

The Benefits

• Increased participation which, in turn, can help testing

• Help participants accumulate funds for retirement

• It is easy for the participants

• QDIA

• May help attract and retain employees

• May provide tax advantages

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AE Is Not For Everyone

• Employer does not want to seem paternalistic or appear to

take advantage of inertia

• May create many small account balances

• Default rate probably not enough

• Added administrative burden and risk

– Payroll must remember to start deductions on time

– Correction for missed deferrals may be a corrective QNEC

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Participants Want Help

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Approximately two-thirds of non-saving workers say they

would be likely to save for retirement if automatic paycheck

deductions, at either three percent or six percent of salary,

were used by their employer. *

*The 2017 Retirement Confidence SurveyMarch 2017 | EBRI Issue Brief #431

Poll Question #1

Which companies might most benefit from AE?

A. Small company with low turnover, payroll person unreliable

B. Medium-sized company with field workers who aren’t good

at remembering to enroll

C. Organized plan sponsor with failed ADP test and employees

who forget to sign up

D. Employer who believes choice is more important than

retirement readiness

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Answer

Which companies might most benefit from AE?

A. Small company with low turnover, payroll

person unreliable

B. Medium sized company with field workers

who aren’t good at remembering to enroll

C. Organized plan sponsor with failed ADP test

and employees who forget to sign up

D. Employer who believes choice is more important than

retirement readiness

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Start at the Beginning

June 22, 1998 IRS issued Revenue Ruling 98-30

– Describes circumstances in which automatic contributions

made on behalf of employees would be treated as

“elective” deferrals

– Helps employees save and (bonus!) typically increases the

average deferral percentage of the NHCEs

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Revenue Ruling 98-30

• Employer to decide percentage to be contributed

• Employer to decide how contributions will be invested

• Employer to give adequate notice and information to

employees so they know how to opt out if desired

– Notice upon becoming eligible and then annually

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Revenue Ruling 98-30

• Department of Labor takes position that participant did not

exercise control over his/her assets

• No fiduciary protection under ERISA section 404(c)

• State laws in existence that would “directly or indirectly

prohibit or restrict” auto enrollment

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Poll Question #2

Which company was the first to put automatic enrollment into effect?

A. IBM

B. Exxon Mobile

C. McDonalds

D. General Motors

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Answer

McDonald's Corporation became the first company to implement automatic

enrollment when it started its 401(k) plan in 1984

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Pension Protection Act of 2006

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Pension Protection Act of 2006

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• Establishes QDIA safe harbor

• Preempts any state law that would restrict an automatic

enrollment arrangement

• Allows for participant withdrawals

PPA Incentives

• Six months to correct failed ADP/ACP tests by distribution

• Safe harbor design – deemed pass of ADP test

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QDIA Safe Harbor

• Qualified Default Investment Alternatives must:

– Not restrict participants from transferring to other

investment choices or impose financial penalties

– Not directly invest in employer stock

– Be a registered mutual fund or managed by an

investment manager

– Be diversified to minimize the risk of large losses

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QDIA Safe Harbor

• Qualified Default Investment Alternatives must:

– Be a life-cycle, target date, or similar product or portfolio

that adjusts asset allocation and risk levels over time as a

participant ages; or

– Be a balanced fund or similar product or portfolio that

allocates assets to meet a “target level of risk appropriate for

participants of the plan as a whole”; or

– Be a managed account that adjusts asset allocations and risk

levels over time to reflect the participant’s age, target

retirement date, or life expectancy

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Additional Safe Harbor Conditions

• Protection is only available if the following are met:

Automatic enrollees must have had the opportunity to direct

their investments, but did not

Automatic enrollees must have been provided with SPD,

SMM, or other notice meeting specific content requirements

At least 30 days prior to eligibility/initial investment

At least 30 days prior to each subsequent plan year

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Additional Safe Harbor Conditions (Continued)

• Protection is only available if the following are met (continued):

– Any plan material related to the investment in the QDIA

must be provided to the automatic enrollee

– Automated enrollee must be given opportunity to move

assets from QDIA to other investment alternatives without

paying a penalty and at least quarterly

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Additional Safe Harbor Conditions (Continued)

• Protection is only available if the following are met (continued):

– Plan must offer a “broad range of investment alternatives,”

as defined in ERISA § 404(c) regulations at DOL Regulation

§ 2550.404c-1(b)(3)

• At least three choices

• Each is diversified with materially different

risk/return characteristics

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Types of Auto Enrollment

• Basic Automatic Contribution Arrangement

• EACA – Eligible Automatic Enrollment Arrangement

• QACA – Qualified Automatic Enrollment Arrangement

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Basic ACA

• Must state that employees will be automatically enrolled in

the plan unless they elect otherwise

• Must specify the percentage of an employee’s wages that will

be automatically deducted from each paycheck

• Must explain that employees have the right to elect not to

participate or to elect a different percentage to be withheld

29US Department of Labor – Automatic Enrollment 401(k) Plans

Basic ACA (Continued)

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• Employers to decide on the business’ contribution to participants, if any, in addition to employee salary deductions

• If the plan sponsor decides to make contributions:

o Employers can match the amount their employees decide to contribute (within the limits of the law) or

o They can contribute a percentage of each employee’s compensation (non-elective contribution) or

o They can do both

o They can do neither

• Employer has the flexibility of changing the amount each year, according to business conditions.

EACA

• Uniform automatic deferral percentage

• Specific notice requirements

• May follow QDIA rules if desired

• Can allow automatically enrolled participants

to withdraw their contributions, with earnings,

within 30 to 90 days of the first contribution (optional)

31US Department of Labor – Automatic Enrollment 401(k) Plans

Withdrawals• Any employee in the EACA can request a distribution of their

default deferrals with similar timing as other plan withdrawals

– Remove all default deferrals up to request date (no restrictions)

– Must adjust for earnings

• Deadline = 90 days after first default deferral or less if chosen

• Can charge standard fee (or less)

• No spousal consent needed

• Taxed in year of distribution (pre-tax contributions)

• Applicable matching contributions forfeited or not made

• Amounts not counted in 402(g) limit or ADP/ACP tests

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EACA Notice Requirements

• Content similar to traditional safe harbor notice

• Default deferral rate stated

• Employee right to choose different rate or dollar amount

• How deferrals will be invested if not elected by employee

• If allowed, permissible withdrawal rights and procedures

• Must be understandable and complete

• Must go to all participants in EACA with time to opt out

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EACA – Special Features

• Does not have to include everyone eligible

– All new employees

– Employees in a specific division(s)

– If not included, no notice requirement, no withdrawals

• If default deferral percentage is applied uniformly to all

eligible, deadline for corrective refunds without ten percent

penalty is extended to six months

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QACA

Safe Harbor meets auto-enrollment

A qualified automatic contribution arrangement (QACA) is a type

of automatic enrollment 401(k) plan that automatically passes

certain kinds of annual required testing. The plan must include

certain features, such as a fixed schedule of automatic employee

contributions, employer contributions, a special vesting

schedule, and specific notice requirements.

35US Department of Labor – Automatic Enrollment 401(k) Plans

QACA (Continued)

• With a QACA, the initial automatic employee contribution must be at least three percent of the employee’s compensation.

• Contributions must automatically increase one percent per year so that, by the fourth year, the automatic employee contribution is six percent of compensation.

• The automatic employee contributions cannot exceed ten percent of compensation in any year.

• The employee is permitted to change the amount of his or her employee contributions or choose not to contribute, but must do so by making an affirmative election.

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Poll Question #3

If a rehired employee has had no QACA deferrals for a full year, the plan may start him/her over again at the three percent initial rate. How is “full year” defined?

A. 12 consecutive months

B. Entire plan year

C. A period with 1,000 hours of service

D. None of these above

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Answer

A. 12 consecutive months

B. Entire plan year

C. A period with 1,000 hours of service

D. None of these above

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QACA Employer Contribution

Employer must make at least either:

1. A matching contribution of 100 percent for salary deferrals up to one percent of compensation and a 50 percent match for all salary deferrals above one percent but no more than six percent of compensation; or

2. A nonelective contribution of three percent of compensation to all participants.

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QACA Employer Contribution Example

Cost for employee earning $50,000 per year:

Three percent non-elective = $1,500 or

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rate amount rate amount rate amount

1% $500 1.0% $500 1.0% $500

2% $1,000 1.5% $750 2.0% $1,000

3% $1,500 2.0% $1,000 3.0% $1,500

4% $2,000 2.5% $1,250 3.5% $1,750

5% $2,500 3.0% $1,500 4.0% $2,000

6% $3,000 3.5% $1,750 4.0% $2,000

Deferral QACA Match Safe Harbor

QACA (Continued)

• In a QACA, you may make additional contributions to employees’ accounts

• You have the flexibility of changing the amounts of these additional contributions each year, according to business conditions

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Growth of Automatic Saving Features

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• Adoption of auto enrollment has grown by 300 percent since 2007

• More than 60 percent of all contributing participants in 2016 were in plans with auto enrollment

• Approximately one-third of contributing participants in 2016 were auto enrolled

How America Saves 2017 - Vanguard

Re-Enrollment

• Plans can provide for an expiration of elections each year

• May apply expiration only to those who have not made an

affirmative election or whose election is before the default

• If no election is made, then default deferrals begin

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Auto Escalation

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Auto Escalation

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• A popular provision even

without ACA

• Applied to employees who have

elected it or

• In a QACA, applied until

participant reaches at least six

percent but no more than ten

percent

Trends and Best Practices

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• Ensure clear, understandable communication

• Higher initial defaults and higher escalation amounts

• Escalation on enrollment form or website

• Embrace re-enrollment for those deferring less than the default

Avoid Pitfalls with Smart Design

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• Rethink immediate entry for deferrals

– Maybe 30 days?

• If withdrawals are allowed, consider shortening window so

they don’t cross with ADP testing

Weigh the Pros Versus the Cons

PROS

• Increase participation

• Improve nondiscrimination testing results

• Help participants accumulate meaningful retirement savings

• Tax advantages

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CONS

• Administrative issues

• Paternalism

• Cost

• Correcting mistakes

• Perceived risk

Temporary Rule for Corrections

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• Typically have three months to correct before QNEC

• Between three months and two years QNEC = 25 percent of missed deferrals plus any missed match

• Two plus years QNEC = 50 percent

• In effect until 2020 - IRS will review to see if this rule encourages more employers to utilize ACAs

• Corrective QNEC not required if error fixed within 9½ months

• Must still make up match in all cases

Which Plans Would Benefit?

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Employers who are ready and willing to undertakeresponsibilities in exchange for the benefits for theiremployees and possibly their testing results

This Matters Because People Matter

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Questions?

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