Boosting Plan Participation Without Auto-Enrollment

Automatic enrollment is being touted as a must-use feature for defined contribution (DC) retirement plan sponsors to increase plan participation and help more employees get on track for retirement, but many plan sponsors cannot use this feature, and some may not believe in forcing employees into their plans.

Specifically, most 403(b) plans that are not governed by the Employee Retirement Income Security Act (ERISA) cannot use automatic enrollment. John Kevin, vice president for the K-12 market at VALIC in Houston, says most K-12 public school systems’ hands are tied by state anti-garnishment laws which say amounts may not be deducted from employee paychecks without written permission. Ellie Lowder, of TSA Consulting and Training Services in Tucson, Arizona, which provides consulting for PlanMember Securities Corp., the National Tax-Deferred Savings Association (NTSA) and other clients in the industry, points out that for 501(c)(3) tax-exempt entities that want to maintain the non-ERISA status of their 403(b)s, ERISA says they must have limited involvement with the plan, and auto-enrollment would run afoul of the law.

These plan sponsors want to boost employee participation and engagement with their plans to ensure retirement readiness of employees and help employees retire when they want. Lowder adds that helping employees retire when they want is a budget-saver, as salaries and certain benefit costs are lower for new employees than for long-term employees.

Kevin tells PLANSPONSOR another reason it is important, especially for public schools, to boost employee participation in their DC plans—403(b)s and 457s—is the increasing uncertainty of public pension benefits. Many public pensions have funding issues, and many have made changes, such as lengthening service requirements and increasing employee contribution requirements. “Boosting DC plan participation adds diversity to retirement savings options for employees as well as employers,” he says. “If we increase participation in DC plans, it will hedge against more uncertainty in the future for pensions, and for Social Security.”

Lowder says the Internal Revenue Service (IRS) has provided another reason for increased interest in boosting participation in non-ERISA 403(b) plans.  She tells PLANSPONSOR that in late 2013, she began to receive reports that the IRS started a new focus in audits, specifically in the K-12 public education market. The IRS had begun to check on effective opportunity for employees to enroll and make changes, as required by 403(b) universal availability rules. “They told me when I followed up with them that they were selecting for audit plans with participation rates as low as 15% to 20%,” she says.

So, what is a non-ERISA 403(b) plan sponsor to do to boost participation and engagement without auto-enrollment as a tool?

Lowder says, during a webcast following her conversation with the IRS, an agent told attendees that to comply with effective opportunity, 403(b) plan sponsors must employ year–round strategies; it is not enough to provide an annual notice of the opportunity to participate in the plan. According to the agent, efforts must include year-round education about the plan and financial issues. Lowder says this should include newsletters, workshops and face-to-face meetings with benefits staff and advisers to encourage enrollment.

Kevin adds that employers should not forget tried and true methods DC plans have been using to boost participation—various communications with participants and one-on-one counseling with advisers. “Communication tactics are already well-developed,” he says, suggesting plan sponsors use a multi-tiered approach, using do-it-yourself calculators, websites, call centers and meetings, to reach a broader set of the employee population. “Ultimately, it’s just a matter of getting participants more engaged and helping them recognize the value of these plans in the face of future uncertainty.”

According to Lowder, plan vendors or providers will need to bring to the attention of employers the need to increase 403(b) plan participation and how to do so because employers do not have expertise in these plans. For example, she notes that K-12 plan sponsors are school business officials; they’re not experts in supplemental retirement plans.

Most K-12 plans, and many other 403(b)s have multiple vendors or providers. Lowder says vendors are approaching plan sponsors about providing more financial education opportunities for employees, but the plan sponsors are questioning how other vendors will react if the plan sponsor allows one to provide financial literacy workshops. She says this can be done, without slighting vendors, if the presenting vendor brings to every workshop a list of all vendors and their contact information and is not allowed to tout itself during workshops. “I’ve seen this, and participation increased for all providers in the plan following the workshops,” she notes.

Lowder adds that the message to employees is important, and education should include workshops about the basics—such as what is an annuity and what is a mutual fund—as well as an offer to help employees calculate the gap between what they will need in retirement and what other benefits and Social Security will provide them. “The call to action is to identify this gap,” she says.