Might the new requirement for an automatic-contribution arrangement slow down creations of new plans?

Under soon-to-be-enacted Internal Revenue Code § 414A, some new § 401(k) or § 403(b) plans must include an automatic-contribution arrangement.

For small-business employers not excused as too new or too small, could this new tax-qualification condition slow down creations of new plans?

Bird, thanks.

Others' outlooks and views?

So funny, but I was in the middle of typing my response that it might slow down MY creation of new plans...

Honestly, I haven't bothered to keep up on SECURE 2.0, as my mentality has been that I'd deal with it when it passed. Now I'll apparently have to deal with it. Retirement looks more attractive than it did a couple of weeks ago, but I can't QUITE do it yet. 

CuseFan, your observations remind me of a business story.

(I’m about three years older than you and, like you, went into the biz in 1984.)

In the 1990s, a mid-size employer (about 20,000 employees) told my client, a growing recordkeeper, it could not be considered unless the recordkeeper alone would receive all salary-reduction agreements and the recordkeeper’s computer would feed all deferral instructions into the paymaster’s computer. The employer’s paymaster would never receive any paper, and would not lift a finger for any data entry. The paymaster would not look for errors. (How could it? The paymaster had no source information.) The recordkeeper had to indemnify the employer against all deferral errors, and for any failure in keeping records.

That setup won’t work for small-business employers.

But is integration of recordkeepers’ and payroll-service providers’ software a way forward?

22 hours ago, Peter Gulia said:

is integration of recordkeepers’ and payroll-service providers’ software a way forward?

Yes, that is likely the best path forward, and many payroll providers and recordkeepers have 360 degree integration, although I think some payroll providers stay 180 so their bundled product can maintain an administrative edge. Still, keeping all relevant information current and accurate in payroll records is a challenge for both larger employers with HR departments because of sheer volume and smaller employers without the dedicated resources to handle in real time. Thankfully (hopefully?) we now have a technological savvy generation that can tackle this, but it doesn't matter how great the technology is if the system inputs are incomplete or inaccurate - or as our generation says, garbage in garbage out.

Another thought - will these changes accelerate consolidation of the provider market, driving out smaller recordkeepers and TPAs, while the 500 gorillas Fidelity and Vanguard et al get even fatter? 

Auto enrollment is, of course, a good thing in that it helps get eligible employees enrolled and participation rates go up. But, if participation rates go up, so too does the cost of the Employer match. So, yes . . . requiring auto enrollment could affect small employers' willingness to start new plans.

I agree with everyone. Retirement is looking pretty good as I don't know if my old brain can keep up with all of this new stuff. I have large client that has many part time people as well as per diems ( who aren't allowed in the plan). Thinking of this just makes my head spin. Early retirement, maybe? Is there still such a thing?

21 minutes ago, Coleboy1 said:

I agree with everyone. Retirement is looking pretty good as I don't know if my old brain can keep up with all of this new stuff. I have large client that has many part time people as well as per diems ( who aren't allowed in the plan). Thinking of this just makes my head spin. Early retirement, maybe? Is there still such a thing?

Secure (1.0?) might have already brought a number of those into the plan as of January 1, 2023...at least for eligibility for 401(k).

JRN, don't the safe-harbor plan designs allow a smaller matching contribution if the plan has the fitting automatic-contribution arrangement?

Cost and complexity (distraction from running a business) are the two most often expressed reasons for not having a plan.  Secure 2.0 will effectively increase costs and increase complexity.

The answer to the OP's question is, in our humble opinion a resounding:

YES.

Yes it will certainly increase the employer's cost in contribution, and administrative fees and soft in-house costs.  Their approach is wrong, financial literacy is the answer.  There are many ways individuals can save for the future, but do they, not.  I am amazed by the simple fact that many individuals fail to establish an emergency fund, let alone saving for retirement.  And the number of individuals who do not have a budget.  Education and focusing on those less served is the answer.  Just my 2 cents (or 1 cent now a days!).  Merry Christmas, Happy Holidays, and all the best to all for a safe and healthy New Year.

Mojo, thank you for your observation.

To extend the discussion, imagine a small-business employer is subject to a State’s or municipality’s law that imposes a play-or-pay tax or other monetary consequence on having no retirement-savings opportunity.

Is such an employer’s administration burden for a new 401(k) plan’s automatic-contribution arrangement much harder than the burden for administering default and affirmatively elected payroll contributions under a State’s or municipality’s Individual Retirement Account program?

I believe it will slow plan sales for smaller employers.  Automatic enrollment is not a popular option in the plans that we currently sell.  A little off topic, but existing plan sponsors will also have stressful administrative changes coming.  Almost all plans without Roth will need to be amended to allow Roth contributions.  Do you think payroll providers will be on top of switching from  pre-tax contributions to Roth contributions once an employee earning more than $140,000 reaches the deferral limit?  And how about recordkeepers,  will they need to convert pre-tax 401(k) contributions to Roth contributions if they need to get reclassified as catch-up contributions due to a failed test, for employees earning more than $140,000?

The March 15th deadline is stressful enough as it is, let alone adding additional nuances for corrections that make sense in theory put are going to be difficult in actual administration.   

I don't disagree with the points of view expressed so far. Beyond just the requirement for automatic enrollment, the requirement for automatic escalation is likely to be burdensome, as it requires the employer to separately track which employees have and have not made an affirmative election, potentially for as long as 12 years after they first became eligible!

Small comfort though it may be, we do get a safe harbor correction method in SECURE 2.0 sec. 350 which should make it easier to stay in compliance for an employer whose implementation is less than perfect.

Another challenge for a recordkeeper’s software is slotting and maintaining an indicator to distinguish between a cash-or-deferred arrangement created before December 23, 2022 (and so unburdened by new I.R.C. § 414A(a)), and one created on or after.

Or as Danny Glover lamented in Lethal Weapon, "I'm getting too old for this s _ _ _ !"