Multiemployer Alert: SECURE 2.0 auto-enrollment feature problematic for multiemployer plans

Update on issues affecting Taft-Hartley plans

Recently the House passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 due to bipartisan support on Capitol Hill. One feature of the bill that should be concerning to plan sponsors of multiemployer plans is the mandatory automatic enrollment provision in 401(k) Plans. While this is a laudable provision and is much needed as it will get more Americans to save for retirement, it would create significant issues from an administration perspective for a majority of multiemployer plans. The provision requires employers with more than 10 employees to automatically enroll new employees at 3% of pay, increasing annually by 1% up to at least 10% but no more than 15% of pay. Participants would have the ability to opt-out of the provision or choose a different election.

Multiemployers plans consist of collectively bargained employees under a single plan of participating employers. There can be a few participating employers to upwards of hundreds of participating employers under a single plan. The Taft-Hartley Act of 1947 allowed for union employees to be covered under a single plan. This allows collectively bargained employees to work for multiple participating employers and continue to receive benefits on a continuous basis under a single plan. This type of arrangement works great for profit-sharing and money purchase pension plans but, for 401(k) plans it creates challenges when implementing and administering a 401(k) provision.

The issue with the 401(k) provision under a multiemployer plan is the difficulty in tracking deferrals because in many instances participants work under multiple participating employers (at times a participant may be working for more than one participating employer at the same time). As a result, to begin, stop, or change deferral elections, members typically need to complete a 401(k) deferral election form and return it to their individual employer. Many times, the fund office, or third-party administrator (TPA), and the recordkeeper only see the end result of the deferral election, which occurs when the employer submits the 401(k) contribution to the plan. It is typically the responsibility of the participant to complete and submit a 401(k) deferral election form to the employer each time they move to a new employer. In this type of setting, adding an auto-enrollment provision will have serious consequences on the administration of the plan.

A few of the major issues we have identified include:

• Auto-enrolling participants: Most participating employers are unaware of whether a member is new to the plan or is coming from another job, so it would be almost impossible to know whether to begin deferrals or not.
• Opting out: Who would be responsible for tracking who has opted out or not? In a single employer plan, this is relatively easy and is handled by the plan’s recordkeeper. However, as noted above, most recordkeepers, fund offices, and TPAs that work on multiemployer plans are not part of the deferral election process. The employer would not be aware of whether the participant has previously opted out. Furthermore, would a participant need to opt-out every time they moved to a new employer or would a single election to opt-out carry over from one employer to the next? By making auto-enrollment mandatory there would need to be a single party tracking this information but it would be complex and potentially subject the plan to serious compliance issues.
• Remaining in compliance: Not starting deferrals in a timely fashion has ramifications for the plan sponsor. While the IRS has addressed this in recent years under the Employee Plans Compliance Resolution System (EPCRS), most multiemployer plans will continuously have problems remaining in compliance due to the complexities of multiple parties being involved.

The effects of making auto-enrollment mandatory for these types of plans may have unintended consequences from this legislation. While more multiemployer plans have decided to add a 401(k) provision to their defined contribution (DC) plans, trustees of multiemployer plans have been hesitant to adopt this provision due to concerns of complying with the timely remittance of 401(k) deferrals required by the U.S. Department of Labor as well as difficulties with deadlines and the collection of data for nondiscrimination testing. Adding a mandatory auto-enrollment feature would give them further pause to offer this benefit to their membership. We expect that stakeholders in multiemployer savings plans will seek an exemption from this auto-enrollment provision when SECURE 2.0 moves to debate by the Senate.

Please contact your Milliman consultant with any questions.