For most employees, retirement is an ultimate goal, but knowing how much and when to start contributing can be a difficult decision. Thanks to the Pension Protection Act of 2006, employers can now automatically enroll participants who do not affirmatively elect otherwise in a retirement plan which allows elective deferrals. This may help employees meet their retirement savings goals.
Help Put Participants on the Right Path With Automatic Enrollment
Benefits of automatic enrollment
- Preparing for retirement: Automatic enrollment may put your client’s participants on a better path toward retirement
- Plan participation: Automatic enrollment can be designed to increase plan participation and contribution percentages over time
- Non-Discrimination testing: For plans which are subject to non-discrimination testing, automatic enrollment may assist in meeting these test
Types of automatic enrollment
There are three types of automatic enrollment that may help participants start saving for retirement:
- Automatic Contribution Arrangement (ACA)
• Employees are automatically enrolled unless they elect otherwise• Plan document specifies the percentage of compensation which will be automatically deducted and contributed to the plan• Employees can elect not to contribute or to contribute a different percentage of their compensation
- Eligible Automatic Contribution Arrangement (EACA)
• Uniformly applies the plan’s default deferral percentage to all employees after giving them the required notice• May allow employees to withdraw automatic contributions, including earnings within 90 days of the date of the first automatic contribution
- Qualified Automatic Contribution Arrangement (QACA)
• Uniformly applies the plan’s default deferral percentage to all employees after giving them the required notice• Meets additional “safe harbor” provisions that exempt the plan form the annual nondiscrimination requirements• Default deferral percentage starts at 3% and gradually increases to 6% with each year the employee participates. This percentage cannot exceed 10%.• Requires an employer contribution of either:a. A matching contribution of 100% of the first 1% and 50% of the next 5% of compensation, orb. A non-elective contribution of 3% of compensation of all participants including those who chose not to defer• Employees must be 100% vested in the employer’s matching or non-elective contribution after no more than 2 years of service• Plan may not distribute any of the required employer contributions due to an employee’s financial hardship
Default Investments if an Employee Does Not Make an Election
Employers must choose an investment for employees’ automatic contributions. They can limit their liability for plan investment losses by choosing a qualified default investment alternative (QDIA) which satisfies the conditions under ERISA Section 404(c)(5). Types of alternatives allowed under a QDIA are a life cycle, target maturity, or a balanced fund as well as a managed account service. Employees must be given the opportunity to change this investment choice.