QACA Automatic Enrollment: Benefits and Pitfalls from a Record Keeper Perspective W. Frank Porter, QPA, QKA Assistant Vice President Empower Institutional f.porter@retirementpartner.com 1
Automatic Enrollment ▪ Types of Automatic Contribution Arrangements ▪ Understanding of the challenges and benefits of automatic enrollment Investment defaults and escalation trends ▪ New hire vs. total eligible sweeps and periodic re-sweeps ▪ Best practices to avoid operational pitfalls and improve the chances of success ▪ Gain insight into the success or failure of various plan designs ▪ Marketing & communication strategies ▪ Administration and recordkeeping considerations 2
How Big an Issue is Auto Enrollment? 2018 PlanSponsor DC Survey indicates ▪ 48% of 401(k) plans auto enroll (including 23.3% in the micro-market – under $5M) ▪ Most common rate is 3% (39.6% of plans) ▪ 48% use GREATER than 3% 3
Participation Rates and Retirement Readiness ▪ 57% for Traditional Enrollment ▪ 81% for all plans ▪ 92% for Auto Enroll Empower Institute: Road to Retirement Vanguard: How America Saves, Success, Aug. 2018 June 2018 4
Increased Participation ▪ Testing results improve ▪ More employees saving for retirement ▪ Help create a “healthy” plan 5
Background ▪ Pension Protection Act of 2006 facilitated the adoption of automatic enrollment policies ▪ Additions to Sec. 401(k)(13), 401(m)(12), and 414(w) to the Code, and ▪ Amendments to Sec. 411(a)(3)(G) ▪ Additional guidance that followed: • Notice 2009-65 on how to amend for automatic enrollment • Rev. Rul. 2009-30 on how automatic enrollment can work when there is an escalator feature included • Notice 2016-16 Mid-Year Changes to Safe Harbor Plans and Safe Harbor Notices 6
Poll Question #1 From a policy perspective only, do you like automatic enrollment? – Yes – No – Neutral 7
Poll Question #2 From a provider perspective only (TP A or recordkeeper), do you like automatic enrollment? – Yes – No – Neutral 8
Types of Automatic Contribution Arrangements ▪ Three types of automatic enrollment: – The basic automatic contribution arrangement (ACA), – the eligible automatic contribution arrangement (EACA), and the – qualified automatic contribution arrangement (QACA) ▪ Timing the basic automatic contribution arrangement (ACA) – added at any time, given the timing of the amendment. – satisfy applicable notice requirement – before the amendment is effective ▪ Safe harbor designed QACA – Amendment timing considerations 9
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 10
QACA ▪ Safe Harbor Plan ▪ Tax Code Section 401(k)(13) ▪ Eliminates ADP/ACP testing ▪ Avoids Top Heavy ▪ Most provisions are the same as the current SH under Section 401(k)(12) 11
QACA Requirements ▪ Automatic Deferral (obviously) ▪ Option to opt out ▪ Notice Requirements ▪ Deferral Percentages ▪ SH Employer Contributions 12
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 13
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) 14
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 15
Minimum Deferral Percentage ▪ May provide a larger % at each level ▪ May not exceed 10% at any level ▪ Note: Hardship suspensions must recommence at level prior to withdrawal 16
Employer SH Contributions ▪ 3% nonelective Or ▪ Matching Contributions $ 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
Required Notice ▪ Timing: – Reasonable period – 30-90 deemed to be reasonable – Date of Hire for immediate eligibility plans ▪ 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
Poll Question #3 ▪ Do you think more employers would add automatic contribution arrangements to their plans if the IRS expanded the self-correction options under EPCRS? – Yes – No – Neutral 21
Types of Automatic Contribution Arrangements ACA Type Description • Basic ACA (ACA) Does not allow a permissible withdrawal option • Does not require employer to match contributions • Does not require Scheduled Increases • No additional rules or restrictions apply to scheduled increases • Eligible ACA (EACA) Allows a permissible withdrawal option • Does not require employer to match contributions • Can generally only be established effective at the beginning of the Plan Year • Does not require Scheduled Increases • No additional rules or restrictions apply to scheduled increases • Qualified ACA (QACA) Meets the Safe Harbor plan requirements that may exempt plan from annual Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) Non-discrimination Testing • If the QACA also satisfies EACA criteria, then QACA allows a Permissible Withdrawal option • Requires minimum percentages of participation, which may be met by scheduling automatic annual deferral increases • Requires employer to match contributions • Can generally only be established effective at the beginning of the Plan Year • Requires Scheduled Increases, unless the initial participant default contribution percentage is 6%. • Participant paycheck contribution percentages must be at least 6% of their salary by their fifth plan year of participation up to a maximum of 10% 22
Considerations ▪ Cost ▪ Increased administration ▪ Low average account balances ▪ Budget for match ▪ More distributions in high turnover companies 23
Considerations ▪ Can HR implement timely? ▪ Do Payroll Company and Record Keeper have access to information timely? 24
Considerations ▪ Am I setting myself up to fail? ▪ Notice requirements ▪ How do I identify auto enrolled employees in a plan (especially a takeover) ▪ Penalty for failure to provide notices 25
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 26
Why Automatic Enrollment ▪ Increases participation in retirement plans ▪ Lessens the burden on taxpayers ▪ Saves employers money 27
Increases Participation 28
The Power of Auto-enrollment Participation Rates 91.0% 71.5% 4.6% Not covered by an Covered by an Automatically Enrolled Employer Plan - Employer Plan by Employer Deductible IRA Only AARP’s Public Policy Institute 29
Lessens Burden on Taxpayers 30
Households at Risk of Financially Insecure Retirement on the Rise National Retirement Risk Index, 1983 – 2016 60% Percent of Households at Risk of Not Having Sufficient Retirement Savings 40% 53% 52% 50% 45% 44% 20% 40% 38% 38% 37% 31% 31% 30% 0% 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 Center for Retirement Research, National Retirement Risk Index / Retirement Research at Boston College 31
Average Household has $3K Saved The National Institute on Retirement Security 32
Average Household Has $3k Saved Nearing Retirement Only $12K Saved The National Institute on Retirement Security 33
Impact on Taxpayers ▪ The total cost to taxpayers for new retirees will top $3.7B over the next 15 years ▪ 18% of retirees will retire with more debt than savings ▪ 10% increase in net worth of the 1/3 least prepared for retirement will save taxpayers $194M through 2030 Source: Notalys 34
Saves the employer money 35
Saves the Employer Money ▪ While the cost of funding matching contributions may be top of mind for the Plan Sponsor, the real cost is a workforce not in a position to retire ▪ Studies indicate that this could be one of the most expensive components for employers when designing total benefit packages 36
Total Workforce Costs by Component 37
Cost to Employers for Retirement Delay Why Employers Should Care About the Cost of Delayed Retirements, Prudential 2017 University of Connecticut's Goldenson Center for Actuarial Research 38
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