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401(k) Plans—Auto-Enroll, Auto-Escalate—
What and How You Can Do It!
Employee Benefits Symposium
Rosewood Hall, SoHo
Birmingham, Alabama
August 22, 2013
Donna Cornwell, O’Neal Steel
B. David Joffe, Bradley Arant Boult Cummings LLP
Gordon Earle Nichols, Bradley Arant Boult Cummings LLP
© 2013 Bradley Arant Boult Cummings LLP 2
Introduction: Why an Employer Should Consider Auto-
Enrollment and Auto-Escalation Features in its 401(k) Plan
If auto-enrollment features result in a higher actual deferral percentage (“ADP”)
for the Non-Highly Compensated Employees (“NHCEs”) in the 401(k) plan, it will
either cause the plan to pass the nondiscrimination test or, if not, to reduce the
amount involved in any correction necessary to satisfy such test.
In certain cases, the use of both auto-enrollment and auto-escalation features
will allow the 401(k) plan to satisfy the nondiscrimination test, regardless of the
ADP of the NHCEs.
As a result, every employer with a 401(k) plan that has difficulty satisfying the
nondiscrimination test should consider auto-enrollment and auto-escalation.
However, there are a number of other factors that should be considered before
the addition of such features.
For example…
Technically, Auto-Enrollment and Auto-Escalation Features
Help a 401(k) Plan satisfy the Code Section 401(k)(3)(C)
Nondiscrimination Test
© 2013 Bradley Arant Boult Cummings LLP 3
Introduction: Why an Employer Should Consider Auto-
Enrollment and Auto-Escalation Features in its 401(k) Plan
On a National Scale, the savings rate is as low as it has
been since the Great Depression.
© 2013 Bradley Arant Boult Cummings LLP 4
Introduction: Why an Employer Should Consider Auto-
Enrollment and Auto-Escalation Features in its 401(k) Plan
The U.S. personal savings rate is also much lower
than it was in the 1970s and 1980s.
Source: nerdwallet.com
© 2013 Bradley Arant Boult Cummings LLP 5
Introduction: Why an Employer Should Consider Auto-
Enrollment and Auto-Escalation Features in its 401(k) Plan
The are a number of academic studies that forecast
a large percentage of the population “at risk”
for having inadequate retirement income.
© 2013 Bradley Arant Boult Cummings LLP 6
Introduction: Why an Employer Should Consider Auto-
Enrollment and Auto-Escalation Features in its 401(k) Plan
And some other studies which demonstrate that,
with auto-enrollment and auto-escalation, the amount of
projected retirement savings increases dramatically!
© 2013 Bradley Arant Boult Cummings LLP 7
Introduction: Why an Employer Should Consider Auto-
Enrollment and Auto-Escalation Features in its 401(k) Plan
These studies provide strong evidence of the power of
Newton’s First Law of Motion (aka Inertia): Every object in
a state of uniform motion tends to remain in that state of
motion unless an external force is applied to it.
TWO VISUAL IMAGES OF INERTIA:
1. A hammer and a nail
© 2013 Bradley Arant Boult Cummings LLP 8
Introduction: Why an Employer Should Consider Auto-
Enrollment and Auto-Escalation Features in its 401(k) Plan
These studies provide strong evidence of the power of
Newton’s First Law of Motion (aka Inertia): Every object in
a state of uniform motion tends to remain in that state of
motion unless an external force is applied to it.
TWO VISUAL IMAGES OF INERTIA:
2. An example that might better resemble the concept when
applied to 401(k) Plan participants:
© 2013 Bradley Arant Boult Cummings LLP 9
Introduction: Why an Employer Should Consider Auto-
Enrollment and Auto-Escalation Features in its 401(k) Plan
Auto-enrollment and auto-escalation features in 401(k)
plans attempt to take advantage of Newton’s Law and help
participants be better prepared for retirement.
Our Panelists today:
David Joffe - Who will discuss the “fine print” of auto-
enrollment and auto-escalation features in 401(k) plans.
Donna Cornwell – Who will present a case study
regarding the implementation of auto-enrollment and
auto-escalation features in the O’Neal Steel, Inc. 401(k)
Plan.
© 2013 Bradley Arant Boult Cummings LLP 10
The Fine Print: The Technical Requirements of Auto-
Enrollment and Auto-Escalation Features
A (Very) Brief History of IRS Guidance
Prior to 2000: Several Internal Revenue Service (“IRS”) Private
Letter Rulings approved various automatic enrollment
arrangements in a somewhat piecemeal fashion.
Revenue Ruling 2000-8:
Affirmed that an auto-enrollment feature which imposed
an automatic 3% deferral election (with the option to opt-
out) was a cash-or-deferred election under Code Section
401(k).
The arrangement described in the ruling provided notice
to the employees that explained automatic enrollment and
the employees’ right to revoke or modify their elections.
© 2013 Bradley Arant Boult Cummings LLP 11
The Fine Print: The Technical Requirements of Auto-
Enrollment and Auto-Escalation Features
• In 2004, in informal guidance, the IRS specified a number
of other provisions that needed to be in any automatic
enrollment arrangement.
• Also, in 2004, the IRS issued revised final regulations
under Code Section 401(k) which approved “any direct or
indirect election” as a permissible deferral election. The
preamble also clarified that a 3% automatic contribution
rate was merely illustrative.
A (Very) Brief History of IRS Guidance
© 2013 Bradley Arant Boult Cummings LLP 12
The Fine Print: The Technical Requirements of Auto-
Enrollment and Auto-Escalation Features
The New Framework under the
Pension Protection Act of 2006
© 2013 Bradley Arant Boult Cummings LLP 13
The Fine Print: The Technical Requirements of Auto-
Enrollment and Auto-Escalation Features
The Pension Protection Act of 2006 (“PPA”) created a new
framework and new terminology for auto-enrollment, auto-
escalation, and default investments:
ACA = Automatic Contribution Arrangement
EACA = Eligible Automatic Contribution Arrangement
QACA = Qualified Automatic Contribution
Arrangement
QDIA = Qualified Default Investment Alternative
The New Framework under the
Pension Protection Act of 2006
© 2013 Bradley Arant Boult Cummings LLP 14
The Fine Print: The Technical Requirements of Auto-
Enrollment and Auto-Escalation Features
ERISA Section 514(e):
Provides specific preemption of state wage-
withholding laws for ACAs.
Applies to 401(k) plans but also any ERISA pension
plan with employee elective contributions.
ACA Requirements:
Plan must specify a uniform percentage of
compensation.
A qualified default investment alternative (“QDIA”)
may be used.
Generally, requires advance notice “within a
reasonable period before [each] plan year” (= at
least 30 days before the plan year).
Automatic Contribution Arrangement (“ACA”)
© 2013 Bradley Arant Boult Cummings LLP 15
The Fine Print: The Technical Requirements of Auto-
Enrollment and Auto-Escalation Features
Code Section 414(w):
Provides for eligible automatic contribution
arrangements (“EACAs”) that permit withdrawals
within the first 90 days.
Applies to 401(k), 403(b), and governmental 457(b)
plans as well as SARSEPs and SIMPLE IRAs.
Requires a uniform percentage (like ACAs).
Advance Notice Requirements
Pre-Eligibility: Not more than 90 days before
eligibility.
Annual: At least 30 but no more than 90 days
before the plan year.
Eligible Automatic Contributions Arrangement (“EACA”)
© 2013 Bradley Arant Boult Cummings LLP 16
The Fine Print: The Technical Requirements of Auto-
Enrollment and Auto-Escalation Features
Code Section 414(w):
Requirements for optional permissive withdrawals:
Permitted within 90 days of initial deferral.
Adjusted for gains & losses to date of distribution.
Distributions included in taxable income (unless
Roth) but no 10% early withdrawal penalty.
Any matching contribution is forfeited.
Eligible Automatic Contribution Arrangement (“EACA”)
© 2013 Bradley Arant Boult Cummings LLP 17
The Fine Print: The Technical Requirements of Auto-
Enrollment and Auto-Escalation Features
Not a QACA.
© 2013 Bradley Arant Boult Cummings LLP 18
The Fine Print: The Technical Requirements of Auto-
Enrollment and Auto-Escalation Features
Code Section 401(k)(13):
Provides for QACAs for 401(k) plans only.
Combines automatic enrollment with automatic
escalation.
An affirmative election stops automatic enrollment
and automatic escalation.
Provides an alternative “safe harbor” for purposes of
satisfying the ADP nondiscrimination test.
Several requirements . . . .
Qualified Automatic Contribution Arrangement (“QACA”)
© 2013 Bradley Arant Boult Cummings LLP 19
The Fine Print: The Technical Requirements of Auto-
Enrollment and Auto-Escalation Features
Code Section 401(k)(13):
• Automatic Contribution Requirement
Initial deferral percentage of at least 3% (applies
when the first contribution is made until the last day
of the following plan year).
Contribution increases each plan year thereafter until
it reaches 6%.
Current employees eligible prior to QACA with an
election (even 0%) can be excluded from automatic
enrollment.
Plan is permitted to have higher percentages up to
10%.
Qualified Automatic Contribution Arrangement (“QACA”)
© 2013 Bradley Arant Boult Cummings LLP 20
The Fine Print: The Technical Requirements of Auto-
Enrollment and Auto-Escalation Features
Code Section 401(k)(13):
• Uniform Percentage Requirement
But can vary based on number of years of service.
A higher rate prior to QACA does not have to be
reduced.
Automatic contributions are suspended for 6 months
following a hardship distribution.
Qualified Automatic Contribution Arrangement (“QACA”)
© 2013 Bradley Arant Boult Cummings LLP 21
The Fine Print: The Technical Requirements of Auto-
Enrollment and Auto-Escalation Features
Code Section 401(k)(13):
• Required “safe harbor” employer contributions:
Matching contribution: 100% of the first 1% of
Compensation, plus 50% of the next 5% of
Compensation (= 3.5% maximum), OR
Non-elective Contribution: 3% of Compensation.
Must be fully vested after no more than two Years of
Service.
Only required to be made for NHCEs.
Qualified Automatic Contribution Arrangement (“QACA”)
© 2013 Bradley Arant Boult Cummings LLP 22
The Fine Print: The Technical Requirements of Auto-
Enrollment and Auto-Escalation Features
Code Section 401(k)(13):
Notice and Effective Date Requirements
Initial notice must be provided early enough so
that employee has a reasonable period of time
after receipt of notice to make elections to opt out
and to determine investment allocations.
Automatic enrollment must be effective no later
than the second pay date after the initial notice is
provided or, if earlier, the first pay date that
occurs at least 30 days after the notice is
provided.
Annual notice must be provided a reasonable
period before plan year (generally, at least 30, no
more than 90 days before the plan year).
Qualified Automatic Contribution Arrangement (“QACA”)
© 2013 Bradley Arant Boult Cummings LLP 23
The Fine Print: The Technical Requirements of Auto-
Enrollment and Auto-Escalation Features
Code Section 401(k)(13):
Plan terms must provide for QACA
May include EACA
May use a QDIA
ERISA Section 404(c)(5) provides significant
fiduciary protection for automatic enrollment
because participants are treated as exercising
control despite automatic enrollment.
QDIAs are STRONGLY RECOMMENDED for
fiduciary protection.
QDIAs are subject to several requirements
regarding permitted investment options and
notices.
Qualified Automatic Contribution Arrangement (“QACA”)
© 2013 Bradley Arant Boult Cummings LLP 24
The Fine Print: The Technical Requirements of Auto-
Enrollment and Auto-Escalation Features
Comparison to ADP Nondiscrimination Safe Harbor
Traditional safe harbor does not require automatic
enrollment.
Traditional safe harbor and QACA both have 3%
nonelective contribution options.
Traditional safe harbor is 100% of the first 3% plus
50% on the next 2% (maximum of 4%); QACA is 100%
of first 1% plus 50% of next 5% (maximum 3.5%).
Overall QACA matching contribution could be
greater depending on opt out group
Run numbers to project/compare the safe harbors
Traditional safe harbor has immediate vesting; QACA
has 2-year cliff vesting.
QACA v. Traditional Safe Harbor
© 2013 Bradley Arant Boult Cummings LLP 25
The Fine Print: The Technical Requirements of Auto-
Enrollment and Auto-Escalation Features
• Auto-Enrollment and Auto-Escalation may result in
operational failures.
Failure to automatically enroll an eligible employee.
Failure to increase contributions under an auto-
escalation feature.
• Operational failures can be addressed under EPCRS.
Generally, a qualified nonelective contribution
(“QNEC”) is required based on 50% of missed deferral
amount.
Corrective contributions are also required for 100% of
the missed matching or nonelective contribution.
Self-Correction Program available for a limited period;
otherwise, use Voluntary Compliance Program.
Employee Plans Compliance Resolution System (“EPCRS”)
© 2013 Bradley Arant Boult Cummings LLP 26
The Fine Print: The Technical Requirements of Auto-
Enrollment and Auto-Escalation Features
ACA = Automatic Contribution Arrangement
ADP = Actual Deferral Percentage
Code = Internal Revenue Code
EACA = Eligible Automatic Contribution Arrangement
EPCRS = Employee Plans Compliance Resolution System
IRS = Internal Revenue Service
NHCE = Non-highly Compensated Employee
QACA = Qualified Automatic Contribution Arrangement
QDIA = Qualified Default Investment Alternative
PPA = Pension Protection Act of 2006
SARSEP = Salary Reduction Simplified Employee Pension Plan
SIMPLE IRA = Savings Incentive Match Plan
VCP = Voluntary Compliance Program
Glossary
27
Case Study: The Implementation of Auto-Enrollment
and Auto-Escalation Features in the O’Neal Steel,
Inc. 401(k) Plan
Donna Cornwell
Human Resource Manager
O’Neal Industries, Inc.
Birmingham, Alabama
Founded in 1921
Corporate office in Birmingham, 3rd generation
leadership
93 locations - 3,000 US employees and 500
international
28
29
O’Neal – a family of companies
30
31
O’Neal Industries
32
Retirement Plan History
In the beginning….
• O’Neal offered a defined benefit pension plan to O’Neal Steel
employees until 2008
• O’Neal offers a 401(k) plan to all employees – in all companies
• Also, a Non-Qualified Deferred Compensation program to select
Executives and Management team members
33
Fast forward . . .– Pension Plan frozen to new and acquired employees
• Benefit calculation modification
• Benefit restriction
• Hard freeze March 31, 2013
– 401(k) – annual Non-Discrimination Testing issues
– NQDC Plan – limited participation
What were we doing about it?- Retirement Committee review of all plans on a continuous basis
- 401(k) – defining opportunities and the tools necessary to help employees understand the value and need of saving to meet financial goals, and ultimately, have sufficient savings for retirement
- Ensure fund offering was in alignment with efficient growth opportunities at reasonable cost to the employee and the plan
Retirement Plan History
34
O’Neal believes that it is essential to weave financial health and
well-being into the Culture of our Organization
Communication
Integrate benefit plan design & workplace
environment
Key Factors of Engagement
34
35
Alignment: Strategy, Metrics, Goals
2012 2013 / 2014March 2007
• Participation and Engagement
– Auto enrollment for new hires
• 401k Education
– Increase onsite meeting schedules
– Employee advice
– One-on-one counseling
• Measure changes in saving patterns
– Increase in enrollment
– Employees becoming proactive in 401(k) account management
• Bring other programs into the mix
– HDHP implementation with company contribution ($900/$2100/$3000 year)
• Implement QACA Safe Harbor 401(k) Plan
• Financial Wellness Program
– Define saving readiness and need of multi-faceted education program
– First time savers
– Get the house in order
– Emphasis on one-on-one counseling and saving readiness
• Define metrics
– Impact on productivity, absenteeism, presenteeism
– Impact on bottom line
• Integration
– Tie to programs
– Make it the culture
July 2011
• Participation and Engagement
– Auto enrollment for all employees
– Auto increase for all employees
– Resolicitation on an annual basis
• Improve financial literacy
– Webinars
– Onsite meetings
36
Key elements to a successful strategy
– Communication – management’s commitment and support
– One size doesn’t fit all – make it meaningful to the employee
– Don’t forget the price – how restructuring of retirement savings plans impact the
cost/budget of other benefit plans
Program elements
– Budgeting and debt management
– Emergency fund and short-term savings
– Income and asset protection
– Retirement and long-term savings
– Distribution and legacy planning
Building the Culture
37
Goal
Offer a financial savings program that demonstrates the company’s commitment
to helping employees meet financial goals and have adequate savings for
retirement.
Program Components:
Auto enrollment and annual re-solicitation
Annual auto-increase
Company match: $1 for $1 on first 1% of contribution; $.50 / $1.00 on next 5%
Communication and Education
o Growing partnership with vendors
o Saving readiness
o Webinars and videos on demand
o Total Reward Statements
o Employee Assistance Program opportunities
2013 401(k) Plan: QACA Safe-Harbor
37
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Program must be multi-faceted, non-discriminatory and offer a variety of levels of education and
financial advice
Employees want to be told how much and how to invest: “Tell me what to do”
Employees want to be successful: “Help prepare me so I can save in my 401k and prepare for
retirement”
Communicate, communicate, communicate: keep the message simple, management must support all
communication platforms
Tie benefit programs together to help employees think about a bigger financial wellness picture
Don’t force the issue – 401k plan savers may not be ready to contribute, and will take out loans and
withdrawals with little hesitation
Continuously re-evaluate the education program’s structure, metrics, participation and engagement
Keep the message consistent
Lessons Learned
39
elect
Current Participation: 95% with 6% average deferral rate
Strategies to Encourage
Employees to
Participate and Engage
Plan Design:
• Expand Auto enrollment from new hires to existing employees with 0% deferrals
• Increase Participants with 1% and 2% up to 6%
• Add Auto Increase Feature – each participant is increased by 1% per year until they cap out at match ceiling
Education Recommendations in conjunction with Plan Design Changes:
• Group and 1:1 meetings at all locations encouraging asset allocation, retirement planning, diversification, and advice.
• Posters, wallet cards, quarterly messaging, and targeted age appropriate investing.
Results
40
For more information:
Donna Cornwell
O’Neal Industries, Inc.
Corporate Human Resources Manager
(205) 599-8549
Thank you
401(k) Plans—Auto-Enroll, Auto-Escalation—
What and How You Can Do It!
Employee Benefits Symposium
Rosewood Hall, SoHo
Birmingham, Alabama
August 22, 2013
Donna Cornwell, O’Neal Steel
B. David Joffe, Bradley Arant, Boult Cummings LLP
Gordon Earle Nichols, Bradley Arant, Boult Cummings LLP