What do you think about a requirement to use an automatic-contribution arrangement?

If enacted as it passed the House of Representatives, the “SECURE 2.0” bill [H.R. 2954] would require a new § 401(k) or § 403(b) salary-reduction agreement to include an automatic-contribution arrangement.

What do BenefitsLink neighbors think about this? Would you like the new requirement? Would you dislike it? And for either view, why would you like or dislike an automatic-contribution requirement?

Dislike: Too much government interference which, unfortunately, is becoming the norm/ Like: Helps EEs save for retirement/may help testing pass/encourages plan participation/the added bonus of a matching contribution 

Thanks for ratherbereading's thoughtful response.

And here's a related question: If the requirement to use an automatic-contribution arrangement (for a plan that has a salary-reduction arrangement) is enacted, how will this change or affect the services you provide?

I think early on it's going to hurt small employers who will invariably have someone in HR not really suited to the job who implements it wrong or fails to implement it.

I think over time as employers and payroll systems get used to it it will be just another feature that is a requirement of a 401(k) plan and will "mostly" run smoothly.

4 hours ago, Peter Gulia said:

If enacted as it passed the House of Representatives, the “SECURE 2.0” bill [H.R. 2954] would require a new § 401(k) or § 403(b) salary-reduction agreement to include an automatic-contribution arrangement.

What do BenefitsLink neighbors think about this? Would you like the new requirement? Would you dislike it? And for either view, why would you like or dislike an automatic-contribution requirement?

11 minutes ago, Lou S. said:

I think early on it's going to hurt small employers who will invariably have someone in HR not really suited to the job who implements it wrong or fails to implement it.

I think over time as employers and payroll systems get used to it it will be just another feature that is a requirement of a 401(k) plan and will "mostly" run smoothly.

 

It should be pointed out that this is the general rule in HR 2954, but there are post-enactment exceptions for new and small employers:

• New businesses that have existed for less than 3 years
• Small businesses. General rule shall not apply earlier than 1 year after the close of the first taxable year with respect to which the employer maintaining the plan normally employed more than 10 employees.  

Auto-enrollment/auto-escalation is working well for us although some of our unions are still not convinced.  We have very few opt-outs, and after nine years of AE we can see clear differences in retirement readiness between the employee groups subject to AE and those who are not.   

I am more worried about the potential requirement that all age 50-catch-up contributions will be Roth.  This is going to cause systems/administrative problems for us if passed, even though we currently allow Roth.  It also removes participant choice, and some have valid reasons for making pre-tax contributions even when close to retirement.  And I don't see the benefit either to the participant or the government--is immediate taxation on the catch-up amount worth all the aggravation this is going to cause?

What do you think the chances are of this provision passing?

As a practitioner, there's nothing I can do about it. Schwab, Fidelity, Vanguard, etc., presumably want it and have large lobbying war chests. We just have to deal with whatever our "public servants" in Congress decide to do.

As a citizen, I think it's a good idea. In fact, I wish private employers could do mandatory pre-tax like state and local governmental plans.

On 5/20/2022 at 4:42 PM, EPCRSGuru said:

And I don't see the benefit either to the participant or the government--is immediate taxation on the catch-up amount worth all the aggravation this is going to cause?

I don't see this provision causing that many issues.  Also, its not just the immediate taxation that is so important.  The Rothification of the catch-up is part of balancing the cost of the bill.  Since they can say that a certain amount will be collected in taxes on Roth, it counters the cost on other items like tax credits or increasing the RBD on RMDs.

On 5/21/2022 at 8:22 PM, Luke Bailey said:

As a citizen, I think it's a good idea. In fact, I wish private employers could do mandatory pre-tax like state and local governmental plans.

Im not sure I would go as far as mandatory pre-tax, but I have come around to embracing auto-enroll for the simple fact that it may help some people save something, and I don't see any harm since you can also opt out.

I think that auto enrollment and escalation are great additions to a plan and do make a huge difference in retirement readiness. My concerns with it are in the implementation and following through by payroll and record keepers. They tout the 360 degree connection make this seamless but find failures to implement timely or change rates across all platforms and payroll plus mistakes between Roth and traditional.  This results in a lot of effort to correct and explain. Great concept but the devil is in the details of the process which has not been great.

4 hours ago, Kac1214 said:

Great concept but the devil is in the details of the process which has not been great.

That is always the case. AE/AE is good policy for general retirement preparedness.

Mandatory Roth-ing of catch-ups? Revenue raiser for sure. But the logistics on that - especially if you have HCEs who after the fact have regular pre-tax deferrals reclassified as catch-up deferrals, could be a headache for sure. Not to mention the person could then be under withheld on income taxes. 

Will it be "all" catchups being Roth, or only those caused by the 402(g) limit?  (As opposed to ADP or 415 or plan limit excess....)  I'd think perhaps they'd let everyone get their first 20,500 in on a pre-tax basis.

Dislike unless some mitigation is offered for a plan sponsor who "forgets" to implement the auto-enroll.

I am a big believer in coupling perennial automatic enrollment and escalation features with plan provisions that provide for "liquidity without leakage along the way to and throughout retirement." However, I am also a big believer in our voluntary system and in ensuring plan sponsors retain control on how they allocate rewards. 

Widespread litigation makes plan sponsors/administrators "gun shy" when it comes to innovations. Some service providers avoid automatic features due to the potential for administrative error.

Let's first simplify automatic features and facilitate self-correction of administrative errors.