According to Internal Revenue Service (IRS) advisory publications, sponsors have some flexibility on how to structure automatic enrollments and contribution increases, with the ability to set up either "basic," "eligible" or "qualified" features that require additional levels of disclosure and rising match contributions.
While McHugh does not think defined contribution (DC) plan sponsors are as tentative now as they once were about auto-deferral increases offered as an "opt-in" feature for participants, they are more timid about marrying automatic enrollment with an automatic escalation provision.
8% of respondents use automatic enrollment, and 26.
According to the SDRS, this gradual adoption has been useful, as the process of introducing automatic enrollments requires each unit to restructure its payroll system to allow for automatic deduction of contributions.
These rules, combined with passage of the Pension Protection Act of 2006, have led to an increase in plans automatically enrolling participants, from 1 percent of all plans in 2004 to 16 percent in 2009, with this 16 percent of plans accounting for almost half of all plan participants nationwide) The private sector continues to view automatic enrollment as an important way to encourage employees to save for retirement, a feature that is also receiving increased attention in the public sector.
9 percent of respondents in a survey of state and local governments reported that their governmental unit has instituted some form of automatic enrollment feature in its defined contribution retirement plan.
for Retirement Plans--In an effort to increase participation among company-sponsored retirement plans, PPA allows for the automatic enrollment
of plan participants.
While automatic enrollments were available before the PPA, this feature has been expanded and added to ERISA and comes with federal pre-emption of state law, thereby eliminating concerns over California labor law restrictions.
If the automatic enrollment feature of a plan is "qualified" it will be treated as satisfying the annual anti-discrimination testing (ADP/ACP tests), and will be exempt from the top-heavy requirements.
To satisfy the automatic enrollment safe harbor, elective contributions must fall within a range from a minimum contribution of 3 percent up to 10 percent of compensation depending on, and increasing with, the employee's length of participation.
The report claimed that "40% of new hires at companies with automatic enrollments are socking away less money than they would if left to enroll voluntarily," citing data from the Employee Benefit Research Institute (EBRI).
More significantly, EBRI's Jack VanDerhei commented later that same day that the WSJ managed to completely ignore the reality that automatic enrollment is "increasing savings for many more -- especially the lowest-income 401(k) participants.