Senior Vice President, Investor Education, FINRA and
President, FINRA Investor Education Foundation
Automatic plan design has gained strong footing in recent years.
The take-up rate among 401(k) plan sponsors stands at about 40% 1.
Experts expect this trend to be replicated among 403(b) providers.
And organizations can automate with the confidence that employees
will view their actions favorably. Research by Retirement Made
Simpler— a coalition of AARP, the Financial Industry Regulatory
Authority and the Retirement Security Project—has shown over-
whelmingly positive employee endorsement of automatic enrollment. 2
Once you say “yes” to automatic enrollment, what are your commu-
nications obligations to your employees? There are a number of essential
notification requirements—and that’s where you have to begin.
The Pension Protection Act (PPA) and subsequent regulations
guide the automation of defined contribution plans. With this guidance,
plan sponsors can automatically enroll new hires and non-participants
into the plan at a set contribution rate.
PPA and resulting IRS regulations created two types of automatic
arrangements that have formal employee notification requirements:
; Eligible Automatic Contribution Arrangements (EACAs)
are those that meet the Department of Labor rules related
to the investment fund a plan sponsor selects for depositing
automatic contributions (default investment funds).
; Qualified Automatic Contribution Arrangements
(QACA) are those that provide a safe harbor from IRS
nondiscrimination testing, provided they include certain
required features, including automatic enrollment and
In both cases, IRS regulations generally require plan sponsors
to provide initial notification to employees within 90 days of plan
eligibility. Plan sponsors must also provide annual notice 30 to 90
days prior to the start of each plan year.
The IRS requires the notification to include an explanation of
the circumstances under which contributions will be made for the
participant, the amount of the contribution (deferral percentage),
the participant’s right to select a different contribution amount—or
to opt out of contributing. The employee communication must also
include information on the default investment fund in the event the
participant does not select an investment.
The notice for QACA plans also needs to include information
on the safe harbor design, including the employer match and vesting
rules. For EACA plans that permit penalty-free contribution
withdrawals within 90 days following the first contribution, the notice
must include this information.
The DOL also established guidance for plan sponsors on default
investments. Sponsors that adopt a Qualified Default Investment
Alternative (QDIA) generally receive protection from fiduciary
liability in the event of investment losses—but this protection is
contingent in part on providing initial and annual notification to
employees about the QDIA. Employees must receive the initial notice
at least 30 days prior to plan eligibility, or at least 30 days before the
first QDIA investment. Employees may receive the notice on the date
of plan eligibility if the plan permits penalty-free withdrawals within
the first 90 days. The annual notice must occur at least 30 days in
advance of the start of each plan year.
The IRS and DOL allow a single initial and annual notice that
covers requirements of both agencies for automatic plans that include
QDIAs. You can find a sample notice that meets both the IRS and
DOL guidelines on the IRS Web site at www.irs.gov.
Disclosure is the cornerstone of securities regulation, and it is a
key element of employee communications with respect to automatic
plans. Plan disclosure documents explain to participants the basics
of plan operation, alert them to changes in the plan’s structure and
operations and provide them a chance to make decisions and take
timely action with respect to their accounts. The summary plan
description (SPD) must be given to participants when they join
the plan and to beneficiaries when they first receive benefits. DOL
and IRS provide additional information in the brochure Automatic
Enrollment 401(k) Plans For Small Businesses.
While there are myriad ways to creatively communicate your
automatic plan features to participants—the bottom line is that
specific rules have been set up that must be followed. Following
the rules goes a long way to keeping your participants adequately
informed about your automatic plan and its benefits to participants. ;
For more information about automatic 401(k) and 403(b) plans, including how to get started
and sample communications documents, visit www.RetirementMadeSimpler.org
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