Data and Research August 28, 2023

Examining the Effects of Changes to UK Auto-Enrollment

A study examined what would happen if the minimum earning threshold for UK auto-enrollment was removed, identifying positive and negative effects.  

Reported by

Eliminating the U.K. trigger for auto-enrollment into workplace pension contributions—which currently requires an individual earn more than 10,000 pounds per year—would have a significant positive effect on the retirement outcomes for 90% of individuals, new research shows. However, the change mulled over by lawmakers across the pond may also have a negative impact on a small but considerable segment of the population, according to modeling and research commissioned by the Pension and Lifetime Savings Association and carried out by the Pensions Policy Institute.

The published report—“Every little helps: Should low earners be encouraged to save?”—explored if removing the 10,000-pound earning requirement would cause harm to the lower earners by squeezing their current income and living standards, according to a press release that accompanied the research findings.

For more stories like this, sign up for the PLANSPONSOR NEWSDash daily newsletter.

“Our study, which examined the potential risks of financial disadvantages prompted by saving for retirement when a low earner, suggests that this change may have a negative impact on a relatively small but still considerable segment of the population, specifically 300,000 individuals out of a total low-earning working population of 3.17 million,” wrote PSLA researchers in the section about initial policy implications and questions raised by the research.

For companies trying to encourage employees to save more for retirement, some plan design features are available that, according to analysis from Vanguard, have proven to increase participation. Vanguard credited plan sponsors’ adoption of automatic enrollment and automatic escalation for U.S. deferral rates staying steadfast through the pandemic, the ensuing market volatility and recent spiking inflation, according to the 2022 PLANSPONSOR Participant Survey.

Among retirement plan participants, auto-enrollment has increased in popularity in the U.S.: For retirement plan participants surveyed in late 2022, 71% agreed employers should auto-enroll workers at a 10% default, compared with 47% in 2021 and 46% in 2020, according to American Century Investments’ 10th Annual Retirement Savers Survey.

In the U.S., the Pension Protection Act passed by Congress in 2006 allowed employers to auto-enroll workers in a workplace retirement plan. Congress followed up with the Setting Every Community up for Retirement Enhancement Act of 2019 and the SECURE 2.0 Act of 2022 to improve on the PPA, creating more incentives and requirements for plan auto-features to drive greater retirement outcomes for sponsors and participants.

SECURE 2.0 will require new retirement plans, from 2025 on, to auto-enroll qualified employees at a contribution rate between 3% and 10% of pay. Plan sponsors must then escalate the contribution rate by 1% annually until it reaches a minimum of 10% or a maximum of 15%, at the discretion of the sponsor. Participating workers can opt out of the structure and select different rates, but absent an expressed preference, sponsors must follow the automated structure as the default.

Auto-enrollment features in employer-sponsored defined contribution retirement plans are favored for removing a barrier to low- and moderate-income workers enrolling and contributing to a retirement plan and for driving higher worker contributions to workplace retirement plans, agreed Rich Johnson, senior fellow and director of the Program on Retirement Policy at the Urban Institute, a Washington, D.C.-based think tank for economic and social policy research.

“Research has shown overwhelmingly that the best way to get lower- and moderate-income workers to participate in a [retirement] plan is to just automatically put them in the plan,” he said previously.

The U.K.’s earnings threshold for auto-enrollment, currently 10,000 pounds, was included in the Pensions Act 2008 (implemented in 2012) to protect the lowest-earning workers from saving for the future when they might be better off having more money in their pockets today, the study noted. Amending the U.K. Pensions Act of 2008 would enable the U.K.’s Secretary of State to remove the Lower Earnings Limit for qualifying earnings.

Administration August 28, 2023

Extension on Catch-Up Contribution Requirement Comes as Relief to Plan Sponsors

The IRS announced last week that plan sponsors have an additional two years to implement the mandatory Roth catch-up provision outlined in SECURE 2.0.

Reported by

Plan sponsors and industry leaders can now breathe easier, as the Internal Revenue Service announced on August 25 a two-year extension on the SECURE 2.0 requirement that any catch-up contributions made by higher-income participants in eligible DC plans be designated as Roth.  

The ERISA Industry Committee had sent an open letter to the Department of the Treasury and the IRS in July requesting the two-year extension for implementation, as many in the industry argued it would be administratively challenging to implement by the original 2024 deadline. 

For more stories like this, sign up for the PLANSPONSOR NEWSDash daily newsletter.

Under Section 603(c) of the SECURE 2.0 Act of 2022, the provisions of Section 603 apply to taxable years beginning after December 31, 2023. However, the IRS noted, the first two taxable years beginning after December 31, 2023, will be regarded as an administrative transition period. 

Section 603 of SECURE 2.0 requires that catch-ups from participants in 401(k), 403(b) or governmental 457(b) plans earning $145,000 or more be made as Roth contributions. 

“Retirement plan sponsors are grateful to the Internal Revenue Service for issuing critically important relief today under the SECURE 2.0 Act,” said Diann Howland, the vice president of legislative affairs at the American Benefits Council, in a statement.  

“Without this additional compliance period, a vast number of plans and employers would not have been able to comply with the new requirement and likely would have had to suspend catch-up retirement contributions,” Howland said. “We commend the IRS for acting in time to preserve these retirement savings opportunities.” 

Carl Gagnon, assistant vice president of global financial well-being and retirement programs at Unum, an insurance company based in Chattanooga, Tennessee, said while his company felt prepared for implementation of the catch-up contributions, the delay is still welcome. 

“Unum was on this early and are pleased that collectively bargained, association [and] smaller plans will have the time to implement Roth and post-tax catch-up provisions,” Gagnon wrote in an email. “We’ll wait for further regulatory guidance and take the time to concentrate on other financial wellbeing program priorities, such as helping employees with student debt management, mental health and building emergency savings.” 

Valerie Burns, human resource director at IFP Motion Solutions Inc. in Cedar Rapids, Iowa, said she also feels relieved to have additional time for implementation.  

“Although we do currently have a Roth component in our plan, we were relieved to have additional time to consider how to implement the requirement and to also allow time for payroll providers to handle the change,” Burns wrote in an emailed response. 

Kristi Baker, a managing partner at CSi Advisory Services, a division of Hub International that provides 401(k) and 403(b) retirement plan consulting, fiduciary oversight, financial wellness and more, added that the extension will help firms avoid making mistakes when implementing the new provision. 

“It is welcome news for our 401(k) and 403(b) plan sponsors,” Baker said in an emailed statement. “While most of our plans have the Roth provision, for those who had not yet adopted it, it is a welcome relief not to rush into decisions. This will allow the time needed to put in place best practices for administration, reducing errors and challenges.” 

In addition, Rich Linton, president and COO of Empower, wrote a statement noting the firm’s support of the IRS decision.  

“The defined contribution retirement system is a terrific example of a highly effective public-private partnership,” Linton said. “The engagement between the industry and the government on this matter proves that we can and will work together to drive improvements to a system that so many Americans rely on to help foster their future financial security.”  

Dave Gray, head of workplace investing platforms at Fidelity Investments added, “This two-year extension is good news for the American retirement saver, and we are relieved and pleased industry concerns have been addressed through this decision. This relief will provide critical time needed to implement the requirement and avoid the unintended consequences that could have led to a negative impact on retirement savings.”

Under the guidance released Friday, catch-up contributions will be treated as satisfying requirements of Section 414(v)(7)(A) through December 31, 2025, even if the contributions are not designated as Roth contributions. Further, a plan that does not provide a designated Roth contribution will be treated as satisfying the requirements of Section 404(v)(7)(B).  

«