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.