This article originally ran on October 13, 2014.
By Ellie Lowder
When the plan sponsor is covered under ERISA, automatic enrollment is being used on a more-frequent basis as a way to increase participation rates in retirement plans. When ERISA applies, ERISA supersedes state statutes, which simply means there are no laws throwing up barriers to the use of automatic enrollment. But, what is the issue when ERISA does not apply?
As of June 2013, there were only seven states where there apparently is no state statute prohibiting the taking money from an employee’s paycheck without that employee’s express authorization. Those seven states at that time were Arkansas, Kansas, Montana, Ohio, South Dakota, Wisconsin and Wyoming. (However, readers are cautioned to check current state statutes since there could have been changes since then.)
In all other states, it appears that written authorization would be required before reducing salary to direct contributions to the 403(b) plan (or to the 457(b) plan, if applicable). In some states, written authorization would be required before every payroll in which contributions would be taken. In some of the states, there are twists to the requirement for written authorization, such as specifics on the amount to be taken, or a minimum number of participants who will have automatic enrollment applied.
It is of vital importance that product providers, TPAs and financial advisors check the current law in their state before suggesting automatic enrollment in a non-ERISA plan, to avoid running afoul of state law. Because state laws change frequently, and because interest in automatic enrollment has been increasing, some states have begun to take interest in encouraging participation in retirement plans.
Non-ERISA plans will be found in the public education segment (since governmental plans are exempt from ERISA), and in churches that have not elected that ERISA coverage will apply.
Issues For Automatic Enrollment in K-14
Before beginning discussions about automatic enrollment with K-14 employers, financial advisors must first become familiar with the statutes in the specific state. It is then important to understand the dynamics in an employer’s willingness to add automatic enrollment to its own 403(b) plan. Some specifics:
- Employers may be hesitant to add automatic enrollment when the plan consists only of voluntary salary reduction contributions, and when employees are already covered under state retirement plans. Automatic enrollment is most often used in the 501(c)(3) market segment when there are matching employer contributions and the 403(b) plan is the only retirement plan offered to employees.
- Because 403(b) accounts are most often individual accounts (annuity contracts and/or custodial accounts) the individual employee must establish the account in which to receive the automatic contributions. Failure to establish the account would leave the employer with nowhere to send the contributions.
- Unions may object to the taking of money from members’ paychecks without their express authorization.
Potential Benefits of Automatic Enrollment
If the problems are overcome, employers will find that automatic enrollment will solve the problem of low participation rates in their 403(b) plan. This will have a two-fold benefit:
- It will surely satisfy the IRS requirement that meaningful opportunity be given to employees to participate, a recent focus of IRS audits.
- It will permit employees to accumulate their own dollars for retirement to offset reduced pension benefits in their state plans (which have occurred in many states as covered in previous articles), thus permitting those employees to retire at normal retirement age – a significant budget savings for employers.