The Agony and Ecstasy of Automatic EnrollmentRobert M. Kaplan, CPC, QPA, CFP, APA

Director of Technical Education

The American Retirement Association

How Big an Issue is Auto Enrollment?

2017 PlanSponsor DC Survey indicates

41.7% of 401(k) plan auto enroll (including 24.8% in the micro-market – under $5 MM)

Most common rate is 3% (40.9% of plans)

39.7% use GREATER than 3%

Participation Rates

78% for all plans

90% for Auto Enroll

63% for Traditional Enrollment

Per 2016 Vanguard Group Center for Investment Research

Increased Participation

Testing results improve

More employees saving for retirement

Help create a “healthy” plan

Considerations

Cost

Increased administration

Low average account balances

Budget for match

More distributions in high turnover companies

Considerations

Can HR implement timely?

Do Payroll Company and Record Keeper have access to information timely?

Considerations

Am I setting myself up to fail?

Notice requirements (to be discussed later)

How do I identify auto enrolled employees in a plan (especially a takeover)

Penalty for failure to provide notices

Auto Escalation

Once in the plan – will the participant increase deferrals?

Many do not

Plan design to increase at a specific point in time may help

Auto Escalation

Just what you wanted – more stats!!!

2017 PlanSponsor DC Survey

35.3% use Auto Escalation

Only 15.3% in the micro-market

Re-Enrollment

Just what you wanted – yes, even more stats!!!

2017 PlanSponsor DC Survey

12.6% use re-enrollment

8.6% for those not participating

4.0% for those not at default rate

The Good and the Bad News

Obviously many are deferring who weren’t participating before

Would those defaulted (example 3%) have actively enrolled at a higher rate

Auto enroll is generally limited to new hires

The Good and the Bad News

When I change employers do I resume where I left off or get re-enrolled at a lower rate?

Industry stats indicate that 6% auto enroll has the same success rate as 3% (employees who do not lower or opt out)

Strategies

When recommending – get input from all parties (HR, payroll and record keeper)

Design entry date that works for all

Immediate entry may be problematic

How about 1 month

Strategies

Document flow of information for new employees and changes

Do I know when a participant has affirmatively elected an amount or has been defaulted (this could impact disclosures and re-enrollment)

Strategies

How will we deal with those that later decide – “I did not know, I did not understand, you never told me, etc….”

EACA –to be discussed later

Will Plan Administrator (HR) handle

Plan Design Options

• ACA

• QACA = Qualified Automatic Contribution Arrangements

• EACA = Eligible Automatic Contribution Arrangements

Types of ACAs

• ACA is any arrangement that does not qualify as an EACA or QACA

• Will become clearer after we define those two types

QACA

• Safe Harbor Plan

• Tax Code Section §401(k)(13)

• Eliminates ADP/ACP testing

• Avoids Top Heavy

• Note: Most provisions are the same as the current SH under §401(k)(12)

QACA Requirements

• Automatic Deferral (of course)

• Option to opt out

• Notice Requirements

• Deferral Percentages

• SH Employer Contributions

QACA Requirements

• As indicated earlier, most of the provisions of the Regulations match the existing SH rules

– Example:• Plan must be amended PRIOR to the beginning of the PY

• QACA must be in place for 12 month period

• Plan may limit deferrals as long as maximum match can still be achieved by NHCEs

QACA Deferral Rules• Applies to all employees without an affirmative

election in place (cannot exclude existing employees or participants)

– Employees must opt out or elect a different percentage

– If an employee had an election in a CODA prior to the effective date of the QACA, then it counts as an affirmative election

– Plan can set an expiration date for elections (so employee has to re-elect)

Uniformity Requirement

• Default deferral must be uniformly applied, with these exceptions:

– Years of QACA participation

– Affirmative election on file

– Hardship withdrawal required suspension

– Contribution or deferral limits have been met

Minimum Deferral %

• Initial period is 3%

• Initial period can last until the end of the year FOLLOWING the year of eligibility

– Can be as long as two full years

Minimum Deferral %

• Period # 2 = 4%

• Period #3 = 5%

• Period #4 = 6%

• Subsequent years = 6%

Minimum Deferral %• May provide a larger % at each level

• May not exceed 10% at any level

• Note: Hardship suspensions must recommence at level prior to withdrawal

Minimum Deferral % Example• Provide 6% from Day 1

– Can leave

– Can increase in any year (but not to greater than 10%)

Minimum Deferral % Example

• Provide 4% from Day 1

– Can leave at 4% for second period

– Must increase to 5% in third period and 6% in 4th

period (but not to greater than 10%)

Employer SH Contributions• 3% nonelective

Or

Employer SH Contributions

• Matching Contribs$ for $ on first 1%, and

50 cents on dollar for next 5%

Total 3.5%

Note: Can be a greater match

Cannot increase match % as rate of deferral increases

Employer SH Contributions

• Fully vested after 2 years (not ASAP)

• Subject to in-service withdrawal restrictions

• Remember other SH rules

– Can’t match in excess of 6%

– Discretionary match cannot exceed 4%

– Can’t have higher rate for HCE

Required Notice

• Timing:

– Reasonable period

– 30-90 deemed to be reasonable

– Date of Hire for immediate eligibility plans

Required Notice

• Content:

– Current SH content, plus• Level of default deferrals

• Right to change deferral %

• Default investment account, if applicable

• May combine notices (EACA, QDIA)

Required Notice

• Delivery method:

– To each employee (not posted)

– Electronic is allowed• Directly to participant

• No kiosk or posting on website

Required Notice

• Whoops, I forgot

– Max of $1,100 per day per failure

EACA Requirements

• Option to opt out

• Automatic deferral

• Uniformity (as discussed earlier)

• Notice requirements

EACA Incentives• Permissive withdrawals

• 6 month ADP/ACP corrections

Permissive Withdrawal

• 90 days

– Starts on day the first deferral would have been included in pay

• No definitive distribution date

– Administratively feasible???

Permissive Withdrawal• All or nothing at all (all deferrals must be

withdrawn, not just some)

• Earnings (gains/losses)

• Forfeit match (and earnings)

– Do not return to Employer

Permissive Withdrawal

• Taxation

– No 10% penalty

– Income in year

distributed

– No rollover

– No consent

Permissive Withdrawal

• Distribution Fees

– Yes

– Cannot differ from ordinary distribution fee

Permissive Withdrawal• Optional provision

• Must be in document and notice

Permissive Withdrawal

• Testing

– Exclude

– Wait to run tests AFTER 90 days

Permissive Withdrawal• Testing Corrections

– 6 months to correct (to avoid 10% penalty)– 10% is from 6 to 12 months– After 12 months – EPCRS

• Note: If EACA rules do not apply to all plan participants (for example only newly eligible) then the 6 month testing rule does not apply

EACA Notice

• Similar to QACA

• Timing rules the same

EACA Notice Content

• SH, plus

• Default %

• Ability to change

• QDIA, if applicable

• Permissive withdrawal, if applicable

QACA/EACA

• If a plan has wants both the QACA and EACA provisions it needs to provide for all language

– Example – QACA may not allow permissive withdrawal unless it has proper EACA language in document

I will be happy to answer any questions on Auto Enrollment issues.

Thank You.

Questions

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