Automatic enrollment, enacted as part of the Pension Protection Act last year, should prove to be a tremendous savings opportunity for employees in corporate America and a huge step toward a healthier financial future. However, workers in some governmental and not- for-profit sector organizations with non-ERISA retirement plans — whether they are 401(k), 403(b) or 457 plans — cannot benefit from this crucial opportunity to encourage retirement readiness. Why are employees in these organizations being left out?
That is because 37 states and the District of Columbia have decades-old wage and hour or payroll laws on the books. Sometimes referred to as anti-garnishment laws, they prohibit businesses from withholding money from an employee’s paycheck without his or her prior written approval. While new federal law pre-empts this restriction for deductions made for retirement plans covered by the Employee Retirement Income Security Act of 1974, there is no such provision for non-ERISA plans sponsored by church or governmental organizations.
For those under ERISA, the new law allows retirement plan sponsors to automatically enroll employees in a workplace savings plan, increase their contributions over time and use lifecycle funds as their plan default, thereby helping employees achieve asset allocation strategies based on their age and expected retirement date. In addition, Congress made permanent the higher contribution limits that were set to expire in 2010.
With automatic enrollment, employees are enrolled in a company’s retirement plan unless they choose to opt out. In other words, the only choice employees have to make when it comes to enrollment is not to save. Industry studies strongly support how effective automatic enrollment can be in combating inertia and increasing employee participation.
Early indicators suggest automatic features will be the tipping point in encouraging employees to save more for their retirement. Our research at Fidelity Investments found that employees who were eligible for automatic enrollment had a participation rate 22 percentage points higher than workers whose companies didn’t provide automatic enrollment.
In the best-case scenario, by jump-starting retirement savings, automatic enrollment is more likely to engage participants in planning and investing in their own retirements. At the very least, it provides an important first step toward retirement security for those workers who need guidance the most.
But before non-ERISA plan sponsors throw up their hands and think there is nothing they can do to get around it, consider the example set by the Sisters of Charity of Leavenworth Health System and the Kansas State Legislature.
Formed in 1972, SCLHS is a system of nine hospitals and four stand-alone clinics in California, Colorado, Kansas and Montana. Not only is SCLHS committed to providing quality health care, but its facilities also strive to be the preferred employer in their respective communities. As part of that effort, SCLHS offers its employees workplace retirement plans with employer contributions. A desire to enhance employee participation rates, combined with the increasing burden placed on individuals to finance their retirements, made auto enrollment a sensible way to encourage their employees to take advantage of the benefit offered to them.
Sensible indeed, but as it turned out, prohibited under Kansas law.
Rather than continue under the status quo, however, SCLHS decided to take action and made a successful case for amending the existing law. Kansas legislators recognized the situation as an opportunity to offer the same savings tools to all employees and retirees — whether or not their workplace plans are regulated by ERISA. Not only does the Kansas law, effective last July 1, now permit automatic enrollment, it also provides relief from liability for non-ERISA plan sponsors when selecting their plan’s default investment option. As a result, the $168 million 403(b) plan of SCLHS now has auto enrollment.
The experience of SCLHS should encourage other non-ERISA plan sponsors with employees located in the states with anti-garnishment laws to consult with their local legal counsel regarding potential restrictions against adopting automatic enrollment. The Kansas Legislature was very receptive to a request from a major not-for-profit employer interested in the welfare of its employees. Chances are other state governments will be willing to listen because their employees face the same constraint.
So take action, because as you can see, the non-ERISA restriction is not in Kansas anymore.
John Begley is an executive vice president with Fidelity Employer Services Co., Boston, a unit of Fidelity Investments. He is responsible for the oversight and management of Fidelity’s workplace retirement savings offerings for health care, higher education and other not-for-profit organizations.
