Compliance July 14, 2005

Feds Unveil Electronic Benefits Data Transmission

July 14, 2005 (PLANSPONSOR.com) - Federal officials have released proposed regulations dealing with how employers can properly use electronic media to provide employee and beneficiary notice and information about their benefit plans.
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A news release from the US Treasury Department and the Internal Revenue Service (IRS) said the procedures would also govern how employers transmitted elections and consents from participants and beneficiaries to benefit plans. According to the announcement, the proposed regulations also reflect the effects of the Electronic Signatures in Global and National Commerce Act (E-SIGN).

The proposal allows employers to rely on electronic media either under the E-SIGN consumer consent rules or under an alternative that is similar to the retirement plan rules for electronic transmission of plan information that were in effect  before E-SIGN and that are both less burdensome on employers and at least as protective for participants.

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According to the regulations, before information can be transmitted electronically, a consumer must first affirmatively consent to receiving the information

electronically and the consent must be made in a manner that reasonably demonstrates the consumer’s ability to access the information in electronic form (or if the consent is not provided in such a manner, that confirmation of the consent be made electronically in a manner that reasonably demonstrates the consumer’s ability to access the information in electronic form), the federal officials said in the news release.

Before giving that consent, the consumer must receive:

  • certain specified disclosures including the hardware or software requirements for access to and retention of the electronic records
  • the consumer’s right to withdraw his or her consent to receive the information electronically (and the consequences that follow the withdrawal of consent)
  • the procedures for requesting a paper copy of the electronic record, and the cost, if any, of obtaining a paper copy.

The regulations would not go into effect until after they are adopted  as final regulations.  The regulations are  here . 

Benefits July 13, 2005

Study: Auto Enroll Programs Boost Lower Income Participants the Most

July 13, 2005 (PLANSPONSOR.com) - Lower-income workers stand to benefit the most from auto enrollment in 401(k) plan as they hit retirement with a higher account balance, according to a new study.
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A news release from the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI) said the agencies’ joint study found that low-income workers would see the biggest boost because they are least likely to participate in a 401(k) plan on their own.

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The report noted that without automatic enrollment K plan participation depends strongly on age and income, and ranges from a low of 37% among the young, lowest-income workers who are K plan eligible to a high of 90% among the older, highest-income eligible workers.

Among those turning 65 between 2030 and 2039 and who are K plan participants, researchers found that without automatic enrollment those in the lowest income quartile would end up with 51% replacement ratio by age 65 (the amount of their pre-retirement income), while those in the third quartile hitting 54%, those in the second quartile 59% and those in the top quartile 67%.

Auto Enrollment Data

By comparison, according to the researchers, among those working for an employer with auto enrollment, the retirement replacement ratio would be:

  • Lowest quartile – 37%
  • Second quartile – 40%
  • Third quartile – 45%
  • Highest quartile – 52%

The figures assume a 3% default contribution rate and a money market fund default investment option.

The EBRI/ICI researchers asserted that an employer’s plan design has a notable impact on a worker’s retirement replacement ratio. According to the data, among those at an auto enrolling employer with a 6% default deferral and a lifecycle fund default investment option, the replacement ratio would be:

  • Lowest quartile – 52%
  • Second quartile – 54%
  • Third quartile – 57%
  • Highest quartile – 63%

Not surprisingly, the EBRI/ICI research also found that workers who are in K plans their entire career do better than those who only work for an employer with a K plan part of the time. For example, the lowest-income participants currently between ages 26 to 35 are estimated to have a median income replacement rate of 25% when they turn 65 if future 401(k) coverage is random; however, they would have a 51% replacement rate if each subsequent job is covered by a 401(k) plan. The trend also holds for the highest-income participants of that age group, who would have a 30% replacement ratio under random coverage and 67% if 401(k) coverage is continuous.

Impact of Default Investment Option

The study also concluded that:

  • 401(k) plans that set a lifecycle fund as the default investment option have higher forecasted income replacement rates than plans that have a money market fund as the default investment option, the study reports.
  • 401(k) catch-up contributions – available to participants who are age 50 and older and are already contributing the limit – primarily increase higher income participants’ projected income replacement rates.

Finally, if employees contribute to IRAs during lapses in 401(k) coverage, lower-income participants are not likely to fall as far behind in retirement savings as are higher-income workers, because contributions from low-income workers to 401(k) accounts tend to be close to IRA limits, the study found. But higher-income workers who are not offered a 401(k) plan at work will not be able to duplicate through IRAs the amounts they tend to contribute to a 401(k) plan.

The full report is here .

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