401(k) Plans Auto-Enroll, Auto-Escalate What and How You Can Do It!

Transcription

1 401(k) Plans Auto-Enroll, Auto-Escalate What and How You Can Do It! Employee Benefits Symposium Rosewood Hall, SoHo Birmingham, Alabama August 22, 2013 Donna Cornwell, O Neal Steel B. David Joffe, Bradley Arant Boult Cummings LLP Gordon Earle Nichols, Bradley Arant Boult Cummings LLP

2 Introduction: Why an Employer Should Consider Auto- Enrollment and Auto-Escalation Features in its 401(k) Plan Technically, Auto-Enrollment and Auto-Escalation Features Help a 401(k) Plan satisfy the Code Section 401(k)(3)(C) Nondiscrimination Test If auto-enrollment features result in a higher actual deferral percentage ( ADP ) for the Non-Highly Compensated Employees ( NHCEs ) in the 401(k) plan, it will either cause the plan to pass the nondiscrimination test or, if not, to reduce the amount involved in any correction necessary to satisfy such test. In certain cases, the use of both auto-enrollment and auto-escalation features will allow the 401(k) plan to satisfy the nondiscrimination test, regardless of the ADP of the NHCEs. As a result, every employer with a 401(k) plan that has difficulty satisfying the nondiscrimination test should consider auto-enrollment and auto-escalation. However, there are a number of other factors that should be considered before the addition of such features. For example 2013 Bradley Arant Boult Cummings LLP 2

3 Introduction: Why an Employer Should Consider Auto- Enrollment and Auto-Escalation Features in its 401(k) Plan On a National Scale, the savings rate is as low as it has been since the Great Depression Bradley Arant Boult Cummings LLP 3

4 Introduction: Why an Employer Should Consider Auto- Enrollment and Auto-Escalation Features in its 401(k) Plan The U.S. personal savings rate is also much lower than it was in the 1970s and 1980s. Source: nerdwallet.com 2013 Bradley Arant Boult Cummings LLP 4

5 Introduction: Why an Employer Should Consider Auto- Enrollment and Auto-Escalation Features in its 401(k) Plan The are a number of academic studies that forecast a large percentage of the population at risk for having inadequate retirement income Bradley Arant Boult Cummings LLP 5

6 Introduction: Why an Employer Should Consider Auto- Enrollment and Auto-Escalation Features in its 401(k) Plan And some other studies which demonstrate that, with auto-enrollment and auto-escalation, the amount of projected retirement savings increases dramatically! 2013 Bradley Arant Boult Cummings LLP 6

7 Introduction: Why an Employer Should Consider Auto- Enrollment and Auto-Escalation Features in its 401(k) Plan These studies provide strong evidence of the power of Newton s First Law of Motion (aka Inertia): Every object in a state of uniform motion tends to remain in that state of motion unless an external force is applied to it. TWO VISUAL IMAGES OF INERTIA: 1. A hammer and a nail 2013 Bradley Arant Boult Cummings LLP 7

8 Introduction: Why an Employer Should Consider Auto- Enrollment and Auto-Escalation Features in its 401(k) Plan These studies provide strong evidence of the power of Newton s First Law of Motion (aka Inertia): Every object in a state of uniform motion tends to remain in that state of motion unless an external force is applied to it. TWO VISUAL IMAGES OF INERTIA: 2. An example that might better resemble the concept when applied to 401(k) Plan participants: 2013 Bradley Arant Boult Cummings LLP 8

9 Introduction: Why an Employer Should Consider Auto- Enrollment and Auto-Escalation Features in its 401(k) Plan Auto-enrollment and auto-escalation features in 401(k) plans attempt to take advantage of Newton s Law and help participants be better prepared for retirement. Our Panelists today: David Joffe - Who will discuss the fine print of autoenrollment and auto-escalation features in 401(k) plans. Donna Cornwell Who will present a case study regarding the implementation of auto-enrollment and auto-escalation features in the O Neal Steel, Inc. 401(k) Plan Bradley Arant Boult Cummings LLP 9

10 The Fine Print: The Technical Requirements of Auto- Enrollment and Auto-Escalation Features A (Very) Brief History of IRS Guidance Prior to 2000: Several Internal Revenue Service ( IRS ) Private Letter Rulings approved various automatic enrollment arrangements in a somewhat piecemeal fashion. Revenue Ruling : Affirmed that an auto-enrollment feature which imposed an automatic 3% deferral election (with the option to optout) was a cash-or-deferred election under Code Section 401(k). The arrangement described in the ruling provided notice to the employees that explained automatic enrollment and the employees right to revoke or modify their elections Bradley Arant Boult Cummings LLP 10

11 The Fine Print: The Technical Requirements of Auto- Enrollment and Auto-Escalation Features A (Very) Brief History of IRS Guidance In 2004, in informal guidance, the IRS specified a number of other provisions that needed to be in any automatic enrollment arrangement. Also, in 2004, the IRS issued revised final regulations under Code Section 401(k) which approved any direct or indirect election as a permissible deferral election. The preamble also clarified that a 3% automatic contribution rate was merely illustrative Bradley Arant Boult Cummings LLP 11

12 The Fine Print: The Technical Requirements of Auto- Enrollment and Auto-Escalation Features The New Framework under the Pension Protection Act of Bradley Arant Boult Cummings LLP 12

13 The Fine Print: The Technical Requirements of Auto- Enrollment and Auto-Escalation Features The New Framework under the Pension Protection Act of 2006 The Pension Protection Act of 2006 ( PPA ) created a new framework and new terminology for auto-enrollment, autoescalation, and default investments: ACA = Automatic Contribution Arrangement EACA = Eligible Automatic Contribution Arrangement QACA = Qualified Automatic Contribution Arrangement QDIA = Qualified Default Investment Alternative 2013 Bradley Arant Boult Cummings LLP 13

14 The Fine Print: The Technical Requirements of Auto- Enrollment and Auto-Escalation Features Automatic Contribution Arrangement ( ACA ) ERISA Section 514(e): Provides specific preemption of state wagewithholding laws for ACAs. Applies to 401(k) plans but also any ERISA pension plan with employee elective contributions. ACA Requirements: Plan must specify a uniform percentage of compensation. A qualified default investment alternative ( QDIA ) may be used. Generally, requires advance notice within a reasonable period before [each] plan year (= at least 30 days before the plan year) Bradley Arant Boult Cummings LLP 14

15 The Fine Print: The Technical Requirements of Auto- Enrollment and Auto-Escalation Features Eligible Automatic Contributions Arrangement ( EACA ) Code Section 414(w): Provides for eligible automatic contribution arrangements ( EACAs ) that permit withdrawals within the first 90 days. Applies to 401(k), 403(b), and governmental 457(b) plans as well as SARSEPs and SIMPLE IRAs. Requires a uniform percentage (like ACAs). Advance Notice Requirements Pre-Eligibility: Not more than 90 days before eligibility. Annual: At least 30 but no more than 90 days before the plan year Bradley Arant Boult Cummings LLP 15

16 The Fine Print: The Technical Requirements of Auto- Enrollment and Auto-Escalation Features Eligible Automatic Contribution Arrangement ( EACA ) Code Section 414(w): Requirements for optional permissive withdrawals: Permitted within 90 days of initial deferral. Adjusted for gains & losses to date of distribution. Distributions included in taxable income (unless Roth) but no 10% early withdrawal penalty. Any matching contribution is forfeited Bradley Arant Boult Cummings LLP 16

17 The Fine Print: The Technical Requirements of Auto- Enrollment and Auto-Escalation Features Not a QACA Bradley Arant Boult Cummings LLP 17

18 The Fine Print: The Technical Requirements of Auto- Enrollment and Auto-Escalation Features Qualified Automatic Contribution Arrangement ( QACA ) Code Section 401(k)(13): Provides for QACAs for 401(k) plans only. Combines automatic enrollment with automatic escalation. An affirmative election stops automatic enrollment and automatic escalation. Provides an alternative safe harbor for purposes of satisfying the ADP nondiscrimination test. Several requirements Bradley Arant Boult Cummings LLP 18

19 The Fine Print: The Technical Requirements of Auto- Enrollment and Auto-Escalation Features Qualified Automatic Contribution Arrangement ( QACA ) Code Section 401(k)(13): Automatic Contribution Requirement Initial deferral percentage of at least 3% (applies when the first contribution is made until the last day of the following plan year). Contribution increases each plan year thereafter until it reaches 6%. Current employees eligible prior to QACA with an election (even 0%) can be excluded from automatic enrollment. Plan is permitted to have higher percentages up to 10% Bradley Arant Boult Cummings LLP 19

20 The Fine Print: The Technical Requirements of Auto- Enrollment and Auto-Escalation Features Qualified Automatic Contribution Arrangement ( QACA ) Code Section 401(k)(13): Uniform Percentage Requirement But can vary based on number of years of service. A higher rate prior to QACA does not have to be reduced. Automatic contributions are suspended for 6 months following a hardship distribution Bradley Arant Boult Cummings LLP 20

21 The Fine Print: The Technical Requirements of Auto- Enrollment and Auto-Escalation Features Qualified Automatic Contribution Arrangement ( QACA ) Code Section 401(k)(13): Required safe harbor employer contributions: Matching contribution: 100% of the first 1% of Compensation, plus 50% of the next 5% of Compensation (= 3.5% maximum), OR Non-elective Contribution: 3% of Compensation. Must be fully vested after no more than two Years of Service. Only required to be made for NHCEs Bradley Arant Boult Cummings LLP 21

22 The Fine Print: The Technical Requirements of Auto- Enrollment and Auto-Escalation Features Qualified Automatic Contribution Arrangement ( QACA ) Code Section 401(k)(13): Notice and Effective Date Requirements Initial notice must be provided early enough so that employee has a reasonable period of time after receipt of notice to make elections to opt out and to determine investment allocations. Automatic enrollment must be effective no later than the second pay date after the initial notice is provided or, if earlier, the first pay date that occurs at least 30 days after the notice is provided. Annual notice must be provided a reasonable period before plan year (generally, at least 30, no more than 90 days before the plan year) Bradley Arant Boult Cummings LLP 22

23 The Fine Print: The Technical Requirements of Auto- Enrollment and Auto-Escalation Features Qualified Automatic Contribution Arrangement ( QACA ) Code Section 401(k)(13): Plan terms must provide for QACA May include EACA May use a QDIA ERISA Section 404(c)(5) provides significant fiduciary protection for automatic enrollment because participants are treated as exercising control despite automatic enrollment. QDIAs are STRONGLY RECOMMENDED for fiduciary protection. QDIAs are subject to several requirements regarding permitted investment options and notices Bradley Arant Boult Cummings LLP 23

24 The Fine Print: The Technical Requirements of Auto- Enrollment and Auto-Escalation Features QACA v. Traditional Safe Harbor Comparison to ADP Nondiscrimination Safe Harbor Traditional safe harbor does not require automatic enrollment. Traditional safe harbor and QACA both have 3% nonelective contribution options. Traditional safe harbor is 100% of the first 3% plus 50% on the next 2% (maximum of 4%); QACA is 100% of first 1% plus 50% of next 5% (maximum 3.5%). Overall QACA matching contribution could be greater depending on opt out group Run numbers to project/compare the safe harbors Traditional safe harbor has immediate vesting; QACA has 2-year cliff vesting Bradley Arant Boult Cummings LLP 24

25 The Fine Print: The Technical Requirements of Auto- Enrollment and Auto-Escalation Features Employee Plans Compliance Resolution System ( EPCRS ) Auto-Enrollment and Auto-Escalation may result in operational failures. Failure to automatically enroll an eligible employee. Failure to increase contributions under an autoescalation feature. Operational failures can be addressed under EPCRS. Generally, a qualified nonelective contribution ( QNEC ) is required based on 50% of missed deferral amount. Corrective contributions are also required for 100% of the missed matching or nonelective contribution. Self-Correction Program available for a limited period; otherwise, use Voluntary Compliance Program Bradley Arant Boult Cummings LLP 25

26 The Fine Print: The Technical Requirements of Auto- Enrollment and Auto-Escalation Features Glossary ACA = Automatic Contribution Arrangement ADP = Actual Deferral Percentage Code = Internal Revenue Code EACA = Eligible Automatic Contribution Arrangement EPCRS = Employee Plans Compliance Resolution System IRS = Internal Revenue Service NHCE = Non-highly Compensated Employee QACA = Qualified Automatic Contribution Arrangement QDIA = Qualified Default Investment Alternative PPA = Pension Protection Act of 2006 SARSEP = Salary Reduction Simplified Employee Pension Plan SIMPLE IRA = Savings Incentive Match Plan VCP = Voluntary Compliance Program 2013 Bradley Arant Boult Cummings LLP 26

27 Case Study: The Implementation of Auto-Enrollment and Auto-Escalation Features in the O Neal Steel, Inc. 401(k) Plan Donna Cornwell Human Resource Manager O Neal Industries, Inc. Birmingham, Alabama 27

28 Founded in 1921 Corporate office in Birmingham, 3 rd generation leadership 93 locations - 3,000 US employees and 500 international 28

29 O Neal a family of companies 29

30 30

31 O Neal Industries 31

32 Retirement Plan History In the beginning. O Neal offered a defined benefit pension plan to O Neal Steel employees until 2008 O Neal offers a 401(k) plan to all employees in all companies Also, a Non-Qualified Deferred Compensation program to select Executives and Management team members 32

33 Retirement Plan History Fast forward... Pension Plan frozen to new and acquired employees Benefit calculation modification Benefit restriction Hard freeze March 31, (k) annual Non-Discrimination Testing issues NQDC Plan limited participation What were we doing about it? - Retirement Committee review of all plans on a continuous basis - 401(k) defining opportunities and the tools necessary to help employees understand the value and need of saving to meet financial goals, and ultimately, have sufficient savings for retirement - Ensure fund offering was in alignment with efficient growth opportunities at reasonable cost to the employee and the plan 33

34 Key Factors of Engagement O Neal believes that it is essential to weave financial health and well-being into the Culture of our Organization Communication Integrate benefit plan design & workplace environment 34

35 Alignment: Strategy, Metrics, Goals March / 2014 Participation and Engagement Auto enrollment for new hires July 2011 Participation and Engagement Auto enrollment for all employees Auto increase for all employees Resolicitation on an annual basis Improve financial literacy Webinars Onsite meetings 401k Education Increase onsite meeting schedules Employee advice One-on-one counseling Measure changes in saving patterns Increase in enrollment Employees becoming proactive in 401(k) account management Bring other programs into the mix HDHP implementation with company contribution ($900/$2100/$3000 year) 35 Implement QACA Safe Harbor 401(k) Plan Financial Wellness Program Define saving readiness and need of multi-faceted education program First time savers Get the house in order Emphasis on one-on-one counseling and saving readiness Define metrics Impact on productivity, absenteeism, presenteeism Impact on bottom line Integration Tie to programs Make it the culture

36 Building the Culture Key elements to a successful strategy Communication management s commitment and support One size doesn t fit all make it meaningful to the employee Don t forget the price how restructuring of retirement savings plans impact the cost/budget of other benefit plans Program elements Budgeting and debt management Emergency fund and short-term savings Income and asset protection Retirement and long-term savings Distribution and legacy planning 36

37 (k) Plan: QACA Safe-Harbor Goal Offer a financial savings program that demonstrates the company s commitment to helping employees meet financial goals and have adequate savings for retirement. Program Components: Auto enrollment and annual re-solicitation Annual auto-increase Company match: $1 for $1 on first 1% of contribution; $.50 / $1.00 on next 5% Communication and Education o Growing partnership with vendors o Saving readiness o Webinars and videos on demand o Total Reward Statements o Employee Assistance Program opportunities 37

38 Lessons Learned Program must be multi-faceted, non-discriminatory and offer a variety of levels of education and financial advice Employees want to be told how much and how to invest: Tell me what to do Employees want to be successful: Help prepare me so I can save in my 401k and prepare for retirement Communicate, communicate, communicate: keep the message simple, management must support all communication platforms Tie benefit programs together to help employees think about a bigger financial wellness picture Don t force the issue 401k plan savers may not be ready to contribute, and will take out loans and withdrawals with little hesitation Continuously re-evaluate the education program s structure, metrics, participation and engagement Keep the message consistent 38

39 Results Current Participation: 95% with 6% average deferral rate Plan Design: Strategies to Encourage Employees to Participate and Engage Expand Auto enrollment from new hires to existing employees with 0% deferrals Increase Participants with 1% and 2% up elect to 6% Add Auto Increase Feature each participant is increased by 1% per year until they cap out at match ceiling Education Recommendations in conjunction with Plan Design Changes: Group and 1:1 meetings at all locations encouraging asset allocation, retirement planning, diversification, and advice. Posters, wallet cards, quarterly messaging, and targeted age appropriate investing. 39

40 Thank you For more information: Donna Cornwell O Neal Industries, Inc. Corporate Human Resources Manager (205) dcornwell@onealind.com 40

41 401(k) Plans Auto-Enroll, Auto-Escalation What and How You Can Do It! Employee Benefits Symposium Rosewood Hall, SoHo Birmingham, Alabama August 22, 2013 Donna Cornwell, O Neal Steel B. David Joffe, Bradley Arant, Boult Cummings LLP Gordon Earle Nichols, Bradley Arant, Boult Cummings LLP