One of the most important contributions a consultant can make to a client’s retirement program is creating a plan design that meets the unique needs of the plan sponsor and the participants for which the retirement benefit is being provided. Each plan sponsor is trying to solve for a retirement gap unique to their own participants. Those who have a defined benefit program or who are eligible to receive a social security benefit are typically looking at a different retirement scenario than those who are solely dependent on participant-directed plans. In addition, those who have the option to receive employer contributions into a retirement plan have a different opportunity than those who are solely reliant on their own contributions to meet their retirement savings needs.
As a plan sponsor, there are many plan design options available, each with the potential to provide plan participants opportunities to help them better reach their retirement goals. One of the most widely recognized plan design options is automatic enrollment. In 2006, the Pension Protection Act (PPA) addressed the fiduciary issue of automatically enrolling participants into “voluntary” retirement programs (401(k) and 403(b)) by establishing a default investment election safe harbor, and addressing the wage garnishment issue by amending ERISA (Employee Retirement Income Security Act of 1974) to specifically preempt any state law “that would directly or indirectly prohibit or restrict” any automatic enrollment arrangement.
Automatic enrollment has generally been considered by behavioral finance and retirement industry professionals to be one of the most effective plan design features to increase plan participation. Studies show that participation in automatically enrolled plans increase to 75-95% of eligible employees – Vanguard, How America Saves: 2013. Several books and research papers, which could be an entirely separate blog, have been published to document the general increase in participation from the implementation of automatic enrollment.
Unfortunately, PPA did not cover public sector sponsored plans, which remain subject to State wage law. AndCo recently reviewed the wage laws for all 50 States and discovered that only 7 states allow for state and local governmental plan sponsors to implement automatic enrollment for deferred compensation. Several state retirement systems have recently sponsored and passed legislation that allowed the state retirement system and its agencies, (and in some cases local employers who elected to participate in the state plan), to implement automatic enrollment. A handful of states would allow anti-garnishment from wages for automatic enrollment if it was part of a collective bargaining agreement. Twenty-six states contain prohibitive language in their wage law due to the requirement for any payroll deduction to be authorized in writing by the employee. It should also be noted that in five States, the wage law language appeared unclear as to whether automatic enrollment would be permitted; and therefore, would require a legal opinion as to the ability for a plan sponsor to implement the feature.
If automatic enrollment is such an effective tool for increasing plan participation, what is a public-sector plan sponsor to do without this in their toolbox? Some may argue that one option is to amend state wage law. Easier said than done, but we are seeing some activity in various states. The State of Georgia, which has allowed the State Retirement System to automatically enroll and escalate employees since 2009, is currently reviewing House Bill 692, which if passed, would allow for automatic enrollment of deferred compensation plans sponsored at the local level, specifically “to provide that the governing authority of a municipality may pay costs or fees associated with an employee’s participation in a deferred compensation plan; to provide that certain public employees may be automatically enrolled in deferred compensation plans, to provide for related matters; to provide for an effective date; to repeal conflicting laws; and for other purposes”. Georgia along with other states such as Alaska and Montana, through legislative initiatives, are addressing the disconnect between wage law language drafted long before the creation of deferred compensation plans, and the need to help employees meet their retirement savings goals using tools already implemented in the private sector. It is not the easiest road to take, but it is arguably one with an impactful result.
Automatic enrollment may not be the tool needed for every public-sector plan sponsor to meet its program’s goals, but it would be useful to have the ability to at least consider the feature when looking at best practices in plan design.
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The views and opinions expressed are solely those of AndCo Consulting. This should not be regarded as investment advice or as a recommendation regarding any particular course of action.
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