Introducing Automatic Enrollment to K-12 403(b)s

Federal and state lawmakers have responded to the retirement crisis with the idea of automatic individual retirement account (IRA) plans.

President Obama introduced the myRA program in his 2014 State of the Union address. Senator Marco Rubio (R-Florida) suggested private-sector workers be allowed to participate in the Federal Thrift Savings Plan (TSP), and several states have established their own state-run plans for private workers that do not access to employer-sponsored retirement plans.

Jessica Kovachick, registered principal and retirement plans specialist at The Legend Group, told attendees at the National Tax-Deferred Savings Association (NTSA) 403(b) Summit in Nashville, among 403(b) plans for public school systems, only about 30% of eligible participants are participating. “That is a part of this nationwide retirement crisis too,” she said.

Now is the time for K-12 403(b) plan sponsors to consider using automatic enrollment, Kovachick told summit attendees, noting that research shows plans with automatic enrollment average about 21% higher participation rates than plans that do not.

Automatic enrollment is not only good for participants, the Internal Revenue Service (IRS) is specifically looking at K-12 plans with low participation rates and questioning why.   

Ray Harmon, Esq., government affairs counsel at the American Retirement Association in Washington, D.C., said employers should consider whether they want to provide something “bare bones” to participants—i.e., the myRA program—or develop a more beneficial and attractive benefit for employees.

Matt Spina, executive vice president and chief operating officer at AdminPartners, said the NTSA formed a committee to research the use of automatic plan features for K-12 and governmental plans. It has developed a guide of suggested best practices for introducing automatic enrollment.

One issue preventing school systems in many states from implementing the feature is state law that doesn’t allow employers to divert pay from employee paychecks. But, Spina noted, there are three states in which automatic enrollment for non-Employee Retirement Income Security Act (ERISA) plans has been made legal—Colorado, Kansas and Arkansas—and there are 19 states in which automatic enrollment is legal because the federal government allows it. These include Washington, California, Idaho, Arizona, New Mexico, Texas, Nebraska, Iowa, Michigan, Kentucky, South Carolina, North Carolina, Virginia, Maryland, Delaware, New Jersey, Connecticut, New York and New Hampshire.                  

“So, in 22 states, plan sponsors can use automatic enrollment right away,” Spina said. He added that plan sponsors and advisers should keep checking because more states could make it legal in the future. However, he noted, there may also be restrictions in collective bargaining agreements that plan sponsors may have to negotiate.

For school systems that do implement automatic enrollment, the NTSA guide suggests they use best practices used by ERISA plans; the default investment should be a qualified default investment alternative (QDIA) as defined by ERISA. In addition, plan sponsors should designate which person or entity is going to handle automatic enrollment so as not to run afoul of universal availability rules. The NTSA guide includes an instructional checklist, model participant notice and frequently asked questions (FAQs) that Spina said the association recommends plan sponsors include in plan documents.

Spina also suggested that advisers working with plans that use automatic enrollment should offer participants plan-level, product-neutral financial literacy education.

“Automatic enrollment will help participants by keeping participation rates increasing and participant assets growing,” Spina concluded.