The Retirement Security Project is calling on Congress to pass legislation that would provide employers with safe harbor provisions exempting them from fiduciary liability and nondiscrimination rules if they offer automatic 401(k) plans.
"In the current 401(k), the worker is faced with an array of choices and does nothing," says Bill Gale, senior fellow at the Brookings Institution and one of the principals of the project. With the automatic 401(k), employees would be enrolled in a diversified investment option that is preapproved by the government and features periodic increases in the percentage of salary that goes into the fund. It would be up to employees to opt out if they wished. "It sets up a system in a way that reduces the information requirements on the workers and gets them doing the right thing," Gale says.
While some companies already offer automatic enrollment and step-ups in their 401(k) plans, there needs to be more incentive for the employers to do this, Gale says. Until now, most of the discussion has centered on how automatic 401(k) features benefit the employees. But that’s not enough to get employers to implement these offerings. "The pension system is interesting in that it has to be attractive enough to get workers to participate, but it also has to be attractive enough for firms to offer it," Gale says.
Concern about fiduciary liability has been the main reason that many employers are hesitant to offer automatic enrollment. Under Section 404c of the Employee Retirement Income Security Act, an employer is not liable for investment decisions made by the employee. "We know that a lot of employers aren’t interested in automatic enrollment because of the fiduciary concerns," says Jan Jacobson, director of retirement policy at the American Benefits Council. "We would like to see legislative action on this safe harbor."
Nondiscrimination testing is another obstacle that employers face. Anything that would lighten the administrative burden and costs of running the tests required to show that there’s a balance between high- and low-earning employees among plan participants would be encouraging, the Retirement Security Project says. "We could say if you have an auto 401(k) and you match contributions by 50 percent, then you have a safe harbor," Gale says.
Such details as which funds would be deemed appropriate for the automatic default and how often to do step-ups in the level of employee contribution raise some questions, observers say.
Jacobson speculates that rather than listing names of funds that have the government’s stamp of approval, the Department of Labor will probably provide more guidance about which kinds of funds would be deemed appropriate. The issue of how often to offer step-ups does pose some administrative questions, she notes.
While it may make more sense from the employees’ point of view to have their 401(k) contributions increased when their salaries increase, it would be easier for companies to just offer step-ups to all employees simultaneously on an annual basis. While employers don’t want employees to feel a step-up in contributions, "at the same time you don’t want it to be so expensive administratively that employers won’t do it," Jacobson says.
The American Benefits Council has been talking to its members about the Retirement Security Project’s ideas, and Jacobson says she believes there will be a legislative proposal based on the recommendations this year. In fact, many believe that this concept has a better chance of becoming a reality this year than the other elements of pension reform being discussed. "Since this is not controversial, it may pass as part of a smaller bill," Jacobson says.
Doug Hinson, a partner in the Atlanta office of Alston & Bird, agrees that the concept sounds feasible and is less controversial than other proposals being discussed.
"It’s clearly easier to pass than Social Security," he says. But there is going to be opposition from those who would perceive the safe harbor provisions as being pro-employer and anti-worker, Hinson adds. "It sounds fairly nonpolitical, but anything that takes away the ability of the participant to sue is always controversial."
The Retirement Security Project, however, says it has received positive feedback from members of government on both sides of the fence. Gale notes that adding the safe harbors would not require a complete rewriting of ERISA, just a few amendments to it.
"There is always concern about the details, but people on both sides seem genuinely interested in this," he says. "Especially given all of the animosity and debate going on, I think there is a core (group) that is looking for stuff that can get done."