401(k) Automatic Deferral

[Tom]

Client already has automatic contribution arrangement ACA - not any safe harbor version.  The plan has no employer contribution (and is not top-heavy.)  The plan has many high paid employees and failed ADP testing.  They want to consider increasing the ACA from 3% to 6%.  I assume they can do thi at any point in the year?  I believe this can/should only apply to newly eligible employees as current eligible employees either were set at 3% ACA or elected something different. EVen if they are able to increase the 3% defaulted employees to 6% I don't think they'd want to do that.

Thank you,

Tom

[Bruce1]

Have you considered a top-paid group? Or are most of the HCE greater than 5% owners? 

[Peter Gulia]

If the plan sponsor’s goal is increasing nonhighly-compensated employees’ elective deferrals:

Beyond increasing an arrangement’s initial default percentage for newly eligible employees, consider also:

a “reenrollment” so a participant with a deferral percentage (whether affirmative or impliedly elected) less than the new initial default percentage is defaulted to that percentage, unless the participant opts out;

an “auto-escalation” provision to increase a participant’s deferral percentage each successive year.

(Everything depends on an appropriate notice and a participant’s opportunity to opt out from whatever default is presented.)

I don’t advocate these plan designs, but merely mention them as provisions some plan sponsors adopt.

Among many factors to consider for these and other plan-design questions, a plan sponsor might consider its guesses and perceptions about how employees might react to a presented default or escalation. Some employers worry that too much attention to an elective-deferral arrangement might awaken some employees, and might lead some to decrease or end one’s deferral election.

A plan sponsor might consider doing only what’s feasible within the employer’s capabilities and the recordkeeper’s and third-party administrator’s services.

[Planit 401k]

Hi Tom---   I am challenged with the current 3% ACA level for this type of plan.  The advisor/sponsor hasn't found their path to having a good conversation to have with new eligible employees.  Moving to 6% or even 10% ACA are both available once good communication is established.  

I'd strongly suggest doing an in-plan re-enrollment for all employees targetinga 6% or 10% ACA as the best course of action to both reduce the HCE's issues and also improve the general retirement savings of the entire group. 

It is increadibly easy to say to the entire group...."ABC Company is excited to again focus all employees on your 401k savings.  Following retirement industry guidance, we have re-set all salary defferal amounts to 10% and as part of this initiative, we want to help each of you personlize your amount to your preferred level.  Here are instructions to personalize your deferral as well as additional information".    Focus on how extremely simple it is for any employee who doesn't want the 6% or 10% to make a quick, simple change to whatever deferral amount they prefer---It takes only 3 minutes to personalize this "default" salary deferral amount and this is a one-time adjustment. 

Focus on the process of building better results for employees inlcuding a very simple and clear pathway for them to personalize that amount.  Then the actual ACA number becomes irrelavant due to the focus on them personlizing whatever number you pick..6%, 10% etc.....

Two thougths here---One is that this is very doable.  Two is that I am not aware of other effective means of quickly moving the testing needle.  ER contributions always can help, but that is dumping 3% to 6% of ABC company payroll to the problem prior to trying the "free" reenrollment.  If the answer is more and better employee guidance/education, then combine that guidance/education with the 6% or 10% re-enroll to be effective.

Due to Secure 2.0 requirements targeting 10% deferral, as an industry we are about to find out 10% is a good starting point (as long as we combine that with clear and effective information). 

And that's my .02 cents....