Upload
others
View
1
Download
0
Embed Size (px)
Citation preview
QACA Automatic Enrollment: Benefits and Pitfalls from a Record Keeper Perspective
W. Frank Porter, QPA, QKAAssistant Vice PresidentEmpower Institutional
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 (TPA or 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 AutomaticContribution 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 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)
▪ 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 options under EPCRS? – Yes
– No
– Neutral
Poll Question #3
21
Types of AutomaticContribution 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 providenotices
25
Auto Escalation
▪ Once in the plan – will the participant increase deferrals?
▪ Many do not
▪ Plan design to increaseat a specific pointin 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 anEmployer Plan -
Deductible IRA Only
Covered by anEmployer Plan
Automatically Enrolledby 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%
Per
cen
t o
f H
ou
seh
old
s a
t R
isk
of
No
t H
avin
g Su
ffic
ien
t R
etir
eme
nt
Savi
ngs
National Retirement Risk Index, 1983 – 2016
Center for Retirement Research, National Retirement Risk Index /Retirement Research at Boston College
Households at Risk of FinanciallyInsecure 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 SavedNearing 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 2017University 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 KeepingConsiderations
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 ExperienceWhen 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 DescriptionDecline 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 or 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 AvailabilityAll
Additional Recordkeeping Service RequirementsDeferral 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 RequirementsDeferral 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 daysprior 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 ChangesRecordkeeper
• 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 DeductionsClient / 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 EnrollmentA 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 EmployeePopulation 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 ASPPASpring Virtual Conference
Thursday, May 169:00 am to 5:00 pm
Five Sessions Including:Washington Update and Late-Breaking Regulatory Developments
Ask the Experts Panel
66