Automatic Enrollment

November 2005

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.

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, 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 annual new retirement savings. Often, advocates propose an associated provision that would require a gradual increase in participation rates. Orzag predicts that such a mandate would increase retirement plan savings by $50 billion a year.

The principal obstacle to implementing automatic enrollment is a state labor law that exists in approximately 30 states. The law requires affirmative consent before any amounts can be deducted from an individual's 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 require 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 to participate in the plan, the employer is making the investment decision. Employers are seeking a “safe harbor” provision to protect them from potential liability from investment loss.

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.

A number of bills have been introduced to mandate automatic enrollments, including most recently the proposals of the Chairman of the House Ways and Means Committee. The proposals all attempt to resolve a number of the issues. Some require mandatory matching and accelerated vesting provisions to qualify for protections from various regulations.

ICMA-RC is actively involved with groups that are promoting this legislation and is seeking to ensure that provisions are included, if possible, that will permit public employers to offer automatic enrollment.