Benefits and Pitfalls from a Record Keeper Perspective W. Frank - - PowerPoint PPT Presentation

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

▪ 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

Automatic Enrollment

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 Success, Aug. 2018 Vanguard: How America Saves, June 2018

4

Increased Participation

▪ Testing results improve ▪ More employees saving for retirement ▪ Help create a “healthy” plan

5

▪ 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

Background

6

From a policy perspective only, do you like automatic enrollment? – Yes – No – Neutral

Poll Question #1

7

From a provider perspective only (TP A

• r recordkeeper), do you

like automatic enrollment? – Yes – No – Neutral

Poll Question #2

8

▪ 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

Types of Automatic Contribution Arrangements

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

• r 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)

▪ 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

Required Notice

▪ Do you think more employers would add automatic contribution arrangements to their plans if the IRS expanded the self-correction

• ptions under EPCRS?

– Yes – No – Neutral

Poll Question #3

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

▪ Increases participation in retirement plans ▪ Lessens the burden on taxpayers ▪ Saves employers money

Why Automatic Enrollment

27

Increases Participation

28

Not covered by an Employer Plan - Deductible IRA Only Covered by an Employer Plan Automatically Enrolled by Employer

4.6% 71.5% 91.0% Participation Rates

AARP’s Public Policy Institute

The Power of Auto-enrollment

29

Lessens Burden on Taxpayers

30

31% 31% 30% 37% 38% 40% 38% 45% 44% 53% 52% 50% 0% 20% 40% 60%

Percent of Households at Risk

• f Not Having Sufficient

Retirement Savings

National Retirement Risk Index, 1983 – 2016

Center for Retirement Research, National Retirement Risk Index / Retirement Research at Boston College

Households at Risk of Financially Insecure Retirement on the Rise

1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016

31

The National Institute on Retirement Security

Average Household has $3K Saved

32

Average Household Has $3k Saved

Nearing Retirement Only $12K Saved

33

The National Institute on Retirement Security

▪ 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

Impact on Taxpayers

34

Saves the employer money

35

▪ 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

Saves the Employer Money

36

Total Workforce Costs by Component

37

Why Employers Should Care About the Cost of Delayed Retirements, Prudential 2017 University of Connecticut's Goldenson Center for Actuarial Research

Cost to Employers for Retirement Delay

38

▪ Availability ▪ Ease of investment ▪ Auto-enrollment ▪ Auto-escalation ▪ Plan reset

Essentials for Adequate Savings

39

▪ Is automatic enrollment appropriate for the plan sponsor and their employees? ▪ For Eligible Automatic Contribution Arrangement (EACA), which employees will be covered? ▪ Which features does the Plan Sponsor want?

Considerations

40

▪ Know what your record keeper can and cannot do, then ask if it differs by size of plan ▪ Anticipate challenges

– Payroll provider to record keeper – Payroll vendor changes – Gauge the employers sustained commitment

Administration and Record Keeping Considerations

41

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

42

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)

43

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

44

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)

45

Strategies

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

46

Participant Experience When newly eligible employees receive an initial notice indicating they will be automatically enrolled into the plan at the plan’s default deferral rate, employees can take one of the following actions: Action Description Decline Participation in the Plan

• Change their contribution rate or percentage to zero prior to the

automatic enrollment date.

• Employees may change deferrals online via the participant website
• r by contacting a Participant Services Representative.

Affirmatively Enroll with Custom Options

• Customize contribution or deferral elections, allocations, and

select from the plan’s available investment options.

• Participants may complete these actions online via the

participant website or by contacting a Participant Services Representative. Accept Automatic Enrollment Employees who do not take any action are automatically enrolled into the plan. 47

Recordkeeping – Service Guide

48

Plan Provides Notices Service Availability All Additional Recordkeeping Service Requirements Deferral Recordkeeping, Online Enrollment Description

• Plan Administrator or TPA prepares Initial and Annual ACA Notices.
• Plan Administrator or TPA distributes Initial and Annual ACA Notices to impacted

employees and participants. Recordkeeper Provides Notice Services Service Availability

• All
• Additional recordkeeping services fees may apply

Additional Recordkeeping Service Requirements Deferral Recordkeeping, Online Enrollment Description

• Recordkeeper generates Initial and Annual ACA Notices according to plan’s

Automatic Enrollment provisions.

• Recordkeeper distributes Initial ACA Notices to impacted employees at least 30 days

prior to automatic enrollment contribution effective date.

• Recordkeeper distributes Annual ACA Notices to impacted participants.
• If annual scheduled increases apply, scheduled increase information is included in the

Annual Notice and distributed to impacted participants at least 30 days prior to effective date of the scheduled increase.

Recordkeeping – Service Guide

Description Responsible Receive Initial ACA Notice Participant

• Receives initial ACA notice.
• Note: See Automatic Enrollment Service Levels described above for options and requirements

related to ACA Notices.

• Takes appropriate action:

− Decline participation in the plan − Affirmatively enroll with custom options − Take no action and accept Automatic Enrollment Report Contribution Changes Recordkeeper

• Collects all defaulted contribution or deferral elections for automatically enrolled participants.
• Collects all deferrals for participants who enrolled with custom options or who elected zero.
• Delivers deferral feedback file to Plan Administrator.
• Deferral changes are reported on the deferral feedback file closest to the payroll cycle in which they

are to go into effect. Adjust Payroll Deductions Client / Payroll Provider

• Reviews deferral feedback file and adjust payroll deductions.
• Reports and deposits updated contributions on next payroll file.

49

Recordkeeping Considerations – How it Works

Description Responsible Receive Annual ACA Notice Participant

• Receives annual ACA notice.
• If automatic increases apply, takes appropriate action:

− Change deferral − Take no action and accept automatic increase Report Contribution Changes Recordkeeper

• Collects all scheduled automatic increase deferrals for automatically enrolled participants.
• Collects all deferrals for participants who changed deferrals to remove them from the automatically

enrolled population.

• Delivers deferral feedback file to Plan Administrator.
• Note the payroll cycle in which they are to go into effect.

Adjust Payroll Deductions Client/ Payroll Provider

• Reviews deferral feedback file and adjust payroll deductions.
• Reports and deposits updated contributions on next payroll file.

50

Recordkeeping Considerations – How it Works

Marketing of Auto-enrollment, Auto- escalation, Plan Reset

Plan Sponsor and Employee Communications

51

Automatic Enrollment

A Guide for Plan Sponsors Executive Summary.......................................................................................................2 Automatic Enrollment Benefits Overview.................................................................4 How It Works.....................................................................................................................5 Selecting Default Investments.................................................................................12 Empower Retirement Services................................................................................14 Ongoing Plan Sponsor Responsibilities..................................................................16 Participant Experience..............................................................................................20 Setup Overview.............................................................................................................22 Key Terms and Definitions.........................................................................................25

Content 52

53

▪ Who to target

– Only newly hired employees – Total eligible employee population

▪ When to target

– Offer periodic re-sweeps – Timing auto-escalation following annual pay increases

Know the Employer and Know the Employee Population Base

54

Auto-enrollment Trends

Automatic enrollment and auto-increases, TowersWatson 55

Auto-enrollment Trends

56

Example – ▪ Auto-enrollment and auto- escalation ▪ After the change to auto- enrollment, participation increased by 67% and employees increased their contribution rates.

Plan Design Successes

57

Example – ▪ Industry group with high turnover ▪ Lower paid employees ▪ Results lackluster for the Sponsor ▪ Higher administration costs due to added participants and heavy distribution requests ▪ CFO not happy with the added cost ▪ HR not pleased with outcome

Plan Design Failures

58

▪ Neglected to provide notices ▪ Provided notice but neglected to follow in execution of administration ▪ Lack of monitoring payroll data ▪ Penalty for corrections

Challenges and Pitfalls

59

▪ Engaging employer to recognize that this is important aspect in helping individuals save for retirement ▪ Creates a healthy plan ▪ Key design success use stacking auto-enroll, auto-escalate, and plan reset

Best Practices

60

▪ What is the default contribution? ▪ What will the default investment be (QDIA)? ▪ Will you default to regular pre-tax or Roth? ▪ How will you handle disclosures?

Considerations

61

▪ Multiple avenues and many considerations prior to execution

– timing of the desired strategy – the plan document provisions – associated notices to employees – the type of automatic contribution arrangement – and money-type options allowed in the plan

▪ Key factors in determining the lead-time needed for implementation

Considerations and Conclusions

62

Focused Efforts Lead To… …Positive Results

63

Questions?

2019 ASPPA Spring Virtual Conference Thursday, May 16 9:00 am to 5:00 pm Five Sessions Including:

Washington Update and Late-Breaking Regulatory Developments Ask the Experts Panel

66