Automatic Enrollment Briefing Paper

While not a new idea, the concept of automatic enrollment of new hires into an employer’s retirement plan has gained considerably more attention in recent months. It has emerged as one of several enhancements to retirement programs that may be included in connection with any eventual Social Security reform legislation.

Under automatic enrollment, a new hire would be enrolled into a retirement plan, unless the participant specifically declines participation. Currently, a new employee must sign up for the plan. Often, the advantages of enrollment are lost among the many competing tasks facing a new employee. This practice would place the burden on the employee to opt out of the plan.

At employers where automatic enrollment has been placed into practice, the results have been notable. In a study by a Wharton professor at a large employer, female participation rose from 35 percent to 86 percent after implementation, Hispanic enrollment went from 19 percent to 75 percent and enrollment for those earning less than $20,000 rose from 13 percent to 80 percent. Overall participation rose from 37 percent to 86 percent.

According to Peter Orzag, director of the Retirement Security Project, mandating automatic enrollment would create $20 billion in new retirement savings a year. Often, advocates propose an associated provision that would require a gradual increase in participation rates. Orzag predicts that such a mandate would increase savings by $50 billion a year.

There are some obstacles to implementing automatic enrollment. The principal issue is labor law in some 30 states that require affirmative consent before any amounts can be taken from payroll. In the private sector, some corporations have implemented automatic enrollment based on readings that certain provisions in ERISA override these state laws. Most corporations want more explicit protection. In the public sector, employers do not even have the argument of ERISA preemption, so there has been little movement toward automatic enrollment.

A second issue that is often raised is where to invest the default deferrals. Since the employee has not taken an affirmative action, the employer is making the investment decision. Employers would want a "safe harbor" provision to protect them from liability from loss of investment dollars if they use an accepted investment vehicle.

A third issue is how to handle de minimis accounts. There is some concern that new employees may be automatically enrolled, decide to drop out and then ignore their small contributions until they end service, which could be many years away. This could make the record keeping cost of handling these accounts prohibitive. One proposal includes a short grace period for employees to opt out and receive penalty-free refund of deferrals.

Four bills have been introduced to mandate automatic enrollments. Two were introduced by former Rep. Rob Portman, who recently became U.S. Trade Representative, and Rep. Ben Cardin (D-MD); one by Rep. Rahm Emanuel (D-IL); and one by Sen. Jeff Bingaman (D-NM).

ICMA-RC is actively involved with groups that are promoting this legislation. The Pension Coalition, which includes representatives of ICMA-RC, is actively pursuing this legislation. ICMA-RC has also met with the Retirement Savings Project on ways that we can participate in their efforts to promote this and other retirement savings initiatives. At this point, however, we have not undertaken any independent promotion of the legislation with our employers or participants.