One of the more compelling recent trends in the world of tax-deferred savings (i.e., 401(k), 403(b) and 457(b) plans) has been the growth in the use of automatic enrollment, or auto-enrollment, features. In a typical auto-enrollment situation, the employer enrolls the employee without the employee’s consent at a predetermined level of employee contributions and a default investment option. Under applicable rules, employees must be given notice of the arrangement and the ability to “opt-out.” There is a growing body of research pertaining primarily to 401(k)s that strongly suggests that once employees “automatically” set aside part of their wages in their employer-sponsored retirement plan, they will tend to stay the course and continue the savings practice on their own.
So, if auto-enrollment is such a great idea, why isn’t everyone using it? Like so many things, the answer is, “there may be legal problems.”
In the past, the problem with most auto-enrollment features was that many states’ laws restricted or prohibited an employer from deducting amounts from an employee’s paycheck without the employee’s written consent. For example, California Labor Code section 221 prohibits such unilateral wage reductions and is punishable both as a misdemeanor crime and through civil penalties. This problem of state laws conflicting with what seemed like a good concept was resolved (partially) as part of the Pension Protection Act of 2007 (PPA), which expressly preempted conflicting state laws as they applied to ERISA plans.
So, the state law problem with auto-enrollment was removed for ERISA-covered plans; but not for non-ERISA plans (those maintained by state and local governments, public agencies and most churches). The non-ERISA plans are still required to comply with state laws that prohibit deducting amounts from an employee’s paycheck without consent. Despite these impediments, we see news reports and studies suggesting a few local governments, at least, have adopted, or are in the process of adopting, auto-enrollment features in their 457(b) plans. The most notable is the City of Los Angeles.
They’re a non-ERISA plan sponsor, so how come they can do it? It appears that L.A. is relying on an exception contained in California Labor Code section 224 that provides that a wage deduction for pension plan contributions should not violate section 221 as long as it is expressly approved in a collective bargaining agreement. This strategy/technique appears to open the possibility of auto-enrollment to a much larger potential audience including sponsors of non-ERISA plans like state and local governments, public agencies and churches. Because of the potential criminal and civil penalties, non-ERISA employers in California should get legal advice before adopting such an arrangement.