Retirement Planning Becomes More Complex With Trend Toward Automatic Plan Enrollment

Retirement Planning

Few things hit more close to home for employees than retirement planning, an organizational offering that's grown increasingly challenging for employers.

Few things hit more close to home for employees than retirement planning, a benefits offering that's grown increasingly challenging for employers. One complicating trend is automatic enrollment retirement plan mandates.

What Is Automatic Enrollment?

Automatic enrollment allows employers to make salary deferral contributions to a retirement plan from an employee's wages, unless the employee actively opts out. In the past, employees had to actively enroll in order to participate in a retirement plan. The new approach forces employees to take action in order to remove themselves from an offered retirement plan.

Why Are States Beginning to Create Legislation to Require Automatic Enrollment?

What's driving the push toward automatic enrollment? According to The Pew Charitable Trusts, more than 30 million American workers don't have access to an employer-based retirement plan.

As of May 2017, California, Connecticut, Illinois, Maryland and Oregon have mandates that require employers that do not already sponsor retirement savings plans to automatically enroll workers in a state-run retirement savings plan.

According to an ADP Research Institute® article, Legislative Trends: State Automatic IRA Retirement Plan Mandates Gain Momentum, states' laws vary as to coverage and other matters, and as many as 20 states are currently considering similar legislation. Factors that are unclear and vary by state include:

  • Coverage levels
  • Minimum organization sizes
  • Worker age minimums
  • Eligibility requirements, such as how to determine residence
  • Due diligence required before opening a financial account on behalf of employees
  • When to communicate the programs and when to provide official notices

Retirement Plan Design Still Tougher for Multi-State Organizations and Others

The challenge is significant and especially for employers that are in multiple states, use large numbers of telecommuters or have part-time, contingent or temporary workers. Make a mistake in states such as California and Illinois and you can be fined up to $250 per employee for first-time noncompliance or $500 per employee for continued noncompliance, ADP notes. For this reason, consider seeking professional guidance when it comes to navigating this extremely challenging environment.

Align Retirement Plan Offerings to Meet Strictest State Guidelines

Businesses that offer their employees may be exempt from the states mandates. However, to ensure compliance, you might consider setting eligibility rules for retirement plans to meet the requirements of the strictest state guidelines. The relative simplicity of this approach could mitigate the risk of noncompliance by a state and may also reduce administrative costs.

Protect Yourself With Qualified Default Investment Alternatives

Pay particularly close attention when looking at the investment options offered in connection with automatic enrollment plans. Investments that perform poorly over time could lead to dissatisfied plan participants. For this reason, make sure your retirement plan offers qualified default investment alternatives that meet federal law requirements and may protect to protect the plan sponsor from investment results.