Companies should institute automatic enrollment for their defined contribution plans without waiting for long-overdue pension legislation.
A provision to encourage automatic enrollment by employers is part of legislation that passed the Senate, and separate legislation that passed the House Ways & Means Committee. It should be a non-controversial provision in the versions of pension legislation that Congress still has to reconcile.
Unfortunately, the pension legislation is unlikely to pass this year and might have to wait until next year.
But 401(k) sponsors should not wait. Employees need to start saving for retirement now, but too many, through ignorance or inertia, do not enroll in available 401(k) plans.
The Internal Revenue Service has ruled that Section 404(c) of the Employee Retirement Income Security Act does not protect employers if they invest automatically on behalf of employees by directing the contributions into a default option when the employees do not select an investment. But the danger to the employer appears small.
The default option, now typically a lifecycle fund, would have to perform disastrously over a number of years for employees to suffer significant damage. And many employers do not bother to try to gain Section 404(c) protection, relying instead on good management to avoid trouble.
Nevertheless, the Department of Labor should issue guidance to make it clear that employers would be protected from participants' lawsuits if a company automatically enrolls employees and invests assets on behalf of automatically enrolled participants.
Assistant Labor Secretary Ann Combs, who heads the Employee Benefits Security Administration, has said in speeches she hopes to propose such guidance by year end, according to a P&I article.
A number of companies already have automatic enrollment, but the number would likely be larger if Congress or the DOL would alleviate concern about any potential liability employers might face, and also about laws in a few states that could prohibit employers' diversion of some employee pay.
An automatic enrollment provision should contain a default investment option to a lifecycle fund or diversified blend of portfolios that is a reasonably appropriate risk level for the participant, and not to conservative money market funds whose risk is low, along with their potential return. Automatic enrollment should also include automatic deferral increases as pay increases. The provision, of course, would allow participants to opt out of automatic enrollment or any of its features.
Automatic enrollment would strengthen defined contribution plans by making participation broader, especially among low-paid employees, and by bringing people into the retirement program who often don't participate, and enhance their retirement income opportunity.
Some 59% of sponsors said they want to implement automatic enrollment in their defined contribution plans, according to a report by Hewitt Associates LLC that was cited in P&I earlier this year.
J.C. Penney Co., Plano, Texas; Qwest Communications International Inc. Englewood, Colo.; International Paper Co., Stamford, Conn.; and International Business Machines Corp., White Plains, N.Y., are among the companies that already have automatic enrollment.
At Penney, participation was at 71% the year before enrollment was adopted in 1997 and was at 86% in 2004.
Prompted by the provision in the Senate bill on the subject, the Federal Retirement Thrift Investment Board, Washington, is in the early stage of a study on whether to adopt automatic enrollment in its $167.2 billion defined contribution plan, the second largest retirement fund after that of the California Public Employees' Retirement System.
Automatic enrollment will help encourage participants to get involvement in their retirement planning at the start of their employment and offer participants a better chance to enhance their retirement income, because most of them will never enjoy defined benefit coverage and won't be able to count on much income from Social Security, unless the system is significantly reformed.
