Auto enrollment not an option for most government DC plans

Even as automatic enrollment plays a greater role for participants in private-sector defined contribution plans, this plan design receives relatively little use among participants in government defined contribution plans.

Twenty-eight states prevent government DC plans — primarily deferred compensation plans — from offering auto enrollment, according to an analysis by the National Association of Government Defined Contribution Administration published April 29. Another 12 states allow partial use.

The main reason: A patchwork of state and municipal laws prohibit wages from being withheld from paychecks without consent of individual employees. "This has created a muddled landscape that is highly localized with little consistency across states," NAGDCA said in a statement describing its research of states' laws.

These laws, which weren't aimed at governmental DC plans or auto enrollment, have been on the books for years, protecting workers from withholding except for certain items such as defined benefit contributions, taxes, court orders and health-care plan contributions. However, the laws have thwarted auto enrollment for government plans.

A NAGDCA survey published in September 2018 found that only 19% of association members offered auto enrollment in 2017 vs. 20% in 2016. State wage withholding laws were the biggest culprit for the low response based on 63 plans with combined assets of $165 billion.

The other main reason: The Pension Protection Act of 2006 encouraged private-sector ERISA plans, primarily 401(k) plans, to offer auto enrollment but excluded public-sector DC plans, which aren't covered by ERISA.

"The Pension Protection Act pre-empted those state (wage withholding) laws," said Marla Kreindler, a Chicago-based partner at Morgan, Lewis & Bockius LLP, which is a NAGDCA member. "It was a springboard for automatic enrollment."

In many states, wage withholding laws "were passed to solve a problem that no longer exists," said John Saeli, managing vice president for strategy, development and implementation for ICMA-RC, the Washington-based record keeper and investment product provider that focuses on government retirement plans.

"There's been a lack of awareness in the strides made in the private sector about auto enrollment" among public plans, said Mr. Saeli, adding that allowing or expanding auto enrollment for public deferred compensation plans hasn't been a high legislative priority in many states.

State-by-state analysis

ICMA-RC worked with Morgan, Lewis & Bockius and NAGDCA to prepare a state-by-state analysis of public-sector DC plans' opportunities and challenges for auto enrollment displayed as an interactive map on the association's website. "We are pretty stoked about NAGDCA's new automatic-enrollment map," said Cindy Rehmeier, NAGDCA's president, predicting that map will educate plan sponsors about what their peers have done or are trying to do.

However, she conceded that adding auto enrollment to public DC plans will come slowly and on a piecemeal basis because it won't be a federal law or regulation issue. "We don't believe it's NAGDCA's place to override state laws," said Ms. Rehmeier, manager of defined contribution plans for the $2.2 billion Missouri State Employees' Retirement System, Jefferson City.

Missouri, for example, is identified by NAGDCA as allowing some auto enrollments in public plans. State employees hired on or after July 1, 2012 — excluding employees of political subdivisions, such as cities and counties, or state universities and colleges — are automatically enrolled in the state's 457 plan.

The automatic enrollment features a 1% annual salary deferral, which Ms. Rehmeier described as "baby steps." Previous efforts at convincing the Legislature to allow automatic escalation have failed, and Ms. Rehmeier said supporters will try again.

Even among states that allow auto enrollment, the NAGDCA research found that government DC plans might not offer this plan design if the laws don't mandate it.

One recent victory was the signing of a law in March by Kentucky Gov. Matt Bevin allowing some full-time state employees — "of the executive, judicial and legislative branches" — to be automatically enrolled in a government 401(k) plan. The law covers employees hired on or after July 1, 2019. Thirty dollars per month will be deducted from employees' paychecks. Employees can opt out.

Supporters of auto enrollment said there's untapped interest among participants in deferred compensation plans — at least theoretically.

In a survey of 400 state and local government plan employees, the non-profit Center for State and Local Government Excellence and ICMA-RC reported that 47% approved the concept of auto enrollment in supplemental retirement plans, while 21% disapproved.

Joshua Franzel, president and CEO of the center, noted that the survey was based on answers to a hypothetical situation, adding that 8% of these respondents were automatically enrolled in a supplemental retirement plan.

Encouraged to save more

Among those who supported the concept, Mr. Franzel said, the most popular reasons were encouraging employees to save more for retirement, expressing concern that employees won't save enough and believing that employees wouldn't enroll on their own.

Among the dissenters, the biggest reasons were the belief that workers — not employers — should have the choice, that supplemental plans should be optional and that employees cannot afford to save.

Mr. Franzel also cited some tangible results of auto enrollment, referring to a March 2018 study by his organization showing that a South Dakota state supplemental retirement plan had higher average participation rates for auto-enrolled participants vs. those who weren't auto enrolled.

The state in 2009 enacted auto enrollment for its supplemental retirement plan, covering newly hired workers. The 2009 law permitted each government entity — state and local — covered by the South Dakota Retirement System and the supplemental retirement plan to offer this option. Looking at first-year employees in the government units that offered auto enrollment between 2010 and 2016, researchers found participation rates among the auto-enrolled group exceeded 90%. The participation rates averaged 5% in agencies that didn't offer auto enrollment in the supplemental retirement plan.

The results "highlight a positive response" to auto enrollment in a supplemental retirement plan even when employees also are covered by a defined benefit plan and Social Security, said the study for which Mr. Franzel was one of three authors.