8 things you need to know about automatic featuresNews added by Benefits Pro on April 10, 2014
By Paula Aven Gladych
It can be a challenge to implement automatic features into an established defined contribution retirement plan, according to the (DCIIA), but features like auto enrollment and auto escalation have helped drive up defined contribution plan participation rates. That’s why the DCIIA developed a list of eight frequently asked questions to help plan sponsors decide if automatic features are right for their plan.
1. Are there any maximum limitations or requirements that plan sponsors should consider when implementing an automatic contribution escalation program? According to DCIIA, plan sponsors are free to choose the maximum auto-escalation percentage for their plan. Plan sponsors who want the protection of the Employee Retirement Income Security Act or the qualified default investment alternative safe harbors can elect any contribution escalation percentage with no maximum, and are not restricted by a 10 percent maximum contribution escalation percentage.
2. Is there a required initial default contribution rate for automatic contribution escalation programs? According to DCIIA, plan sponsors can choose any initial default contribution rate for their automatic contribution escalation programs. In years past, the default was typically 2 to 3 percent, but there is nothing stopping a plan from making the default contribution rate 5 percent or more. ERISA and QDIA safe harbors also don’t put a limit on the specified default contribution rate. The only time a required minimum initial default contribution rate applies is if the plan sponsor wishes to adopt the Qualified Automatic Contribution Arrangement safe harbor from nondiscrimination compliance testing included in the Pension Protection Act.
3. Must automatic contribution escalation programs have a 1 percent step-up auto escalation rate? While most plans do adopt a 1 percent annual increase, there is no requirement to use 1 percent. Plan sponsors are free to use a higher step-up percentage if they choose. They also can step up the rate on a semi-annual basis.
4. Are plan sponsors required to tie the initial default contribution rate under an auto enrollment program to the plan’s maximum matching contribution percentage? Plan sponsors are permitted to select any initial default contribution rate and are not required to tie the rate to the plan’s matching contribution formula in any way. The only time a required minimum initial default contribution rate applies is if the plan sponsor wishes to use the Qualified Automatic Contribution Arrangement nondiscrimination safe harbor. The QACA design requires the initial auto enrollment percentage be at least 3 percent or as high as 10 percent.
5. Are auto enrollment programs permitted to have different initial default contribution rates, auto escalation rates and/or auto escalation caps for different groups of employees? Yes, according to DCIIA. Plan sponsors are free to design their plans with different initial default contribution rates, auto contribution escalation rates or auto escalation caps for different groups of employees. For instance, a plan sponsor could have a lower rate for part-time employees and a higher one for full-time employees. Plan sponsors do need to make sure that the different auto escalation rates satisfy nondiscrimination requirements.
6. Are automatic enrollment programs required to sweep in existing employees? It is up to plan sponsors to decide if they want to go back and include existing employees who never enrolled in the company-sponsored retirement plan, according to DCIIA. Plans that want to comply with the QACA nondiscrimination safe harbor must auto enroll all eligible employees except those who definitively said they do or don’t want to participate in the plan.
7. Are plan sponsors who previously implemented auto enrollment programs permitted to automatically re-enroll participants who previously opted out? Plan sponsors are free to design their plans to auto enroll existing employees, including those who opted out of auto enrollment previously.
8. Are automatic contribution escalation programs required to sweep in existing employees? Plan sponsors are free to decide whether or not to auto-escalate existing employees.
The Defined Contribution Institutional Investment Association is a nonprofit association dedicated to enhancing the retirement security of American workers.
Originally published on BenefitsPro.com
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