Is Auto-Enrollment right for your company or organization?

Since the Pension Protection Act of 2006 (PPA), Automatic Enrollment features in 401(k) and 403(b) plans have increased in popularity for large and small employers alike. PPA added fiduciary protection for Plan Sponsors, as well as safeguards for employees with requirements for advanced notices and default investments. But what exactly is an Automatic Enrollment feature? Is it appropriate for your plan design? First, let’s look at the requirements, then we’ll look at the pros and cons. With the right knowledge and information, you can determine if the Automatic Enrollment feature is right for you.

Educating Participants and Auto-Enrollment Options

The basic tenet of an Automatic Enrollment feature is this; Employees do not participant in the 401(k) plan mainly because of apathy and lack of education. They don’t know how much to contribute, and they don’t know where to invest their funds. An Automatic Enrollment feature takes that decision away from the employee; the employee is automatically enrolled in the 401(k) or 403(b) plan at a default level and their contributions are invested in a default investment fund unless the employee proactively says no.

There are three types of automatic options to consider: Automatic Contribution Arrangement (ACA), Eligible Automatic Contribution Arrangement (EACA), and Qualified Automatic Contribution Arrangement (QACA).

Here’s a quick overview of each:

ACA – The most flexible design, where there is no minimum contribution rate or required auto-escalation. There is also no required employer contribution.  This design can be added to a plan at any time.

EACA – This design is like an ACA where there is no minimum contribution rate or required auto-escalation. There is also no required employer contribution.  However, an EACA must be in place as of the first day of a Plan year. Also, employees may have up to 90 days to request to receive the return of their employee deferrals, without incurring the tax penalty.

QACA – The least flexible design, where there is a minimum contribution rate, the employer must provide a specific matching contribution, and participants must be fully vested in this match within two years of service.  The QACA generally must be in place the entire year.  If done correctly, this design will automatically satisfy certain non-discrimination testing.  Also, employees may have up to 90 days to request to receive the return of their employee deferrals, without incurring the tax penalty.

Benefits and Drawbacks of Auto-Enrollment

The automatic enrollment feature isn’t a one size fits all and it isn’t the best choice for all companies and organizations, so look at these pros and cons before moving forward.

Benefits of auto-enrollment:

  • Employees will be more likely to participate, and contributions will increase – This can help when it is hard to get employees to take part in the enrollment process.
  • Employers may provide an automatic escalation feature where employees increase their contribution rate each year.
  • Employees will defer paying income tax on their contributions.
  • Employees are more likely to meet their retirement goals by participating immediately when they become eligible, rather than potentially waiting until later in their career.
  • Auto-enrollment may help the nondiscrimination testing results, while the QACA plan will exempt a plan from certain nondiscrimination testing requirements.

Possible drawbacks of auto-enrollment:

  • Setting the auto-enrollment contribution rate lower than a participant would have elected may negatively impact employee retirement savings goals, while setting it too high may cause employees to fully opt-out of the plan, negatively impacting both employee savings and overall participation.
  • Employees may become disengaged and wrongly believe their needed retirement savings will be taken care of with auto-enrollment. The defaulted investment option may not be appropriate for the employee based on their specific situation. As Plan Sponsors, companies should continue to provide retirement education programs to their employees through their plan’s investment advisor to address this potential pitfall.
  • There may be some added administrative time to incorporate and explain the automatic enrollment feature to employees, including the notice requirements for both the default or increasing deferral rate and the default investment option chosen by the employer.
  • Employer matching contributions may increase with increased employee participation.
  • Payroll integration is a must! Missing the first deduction for a newly eligible employee or missing the automatic increase deadline for a plan offering auto-increase features, can result in penalties to the employer, and a required contribution equal to 25% of the missed deferral plus the full match that should have been contributed.
  • Small balances – since newly eligible participants are default enrolled, their initial account balances may reduce the average account balance of the plan overall. Some investment platforms may charge higher fees for plans with lower average account balances, so make sure to check with yours.

Still not sure if auto-enrollment is right for your organization?

While there is no blanket answer, we can help you understand how implementing an auto-enrollment feature might affect your company or organization – Contact us today!

Choosing an Auditor for your Retirement Plan

With summer upon us and fiscal deadlines approaching, you may be facing the daunting task of hiring an auditor. 

ERISA requires an annual audit on plans with more than 100 eligible participants. Choosing a qualified plan auditor helps insure that you meet your legal responsibility to file a complete and accurate annual report/return known as the Form 5500. This form must meet standards from both the Internal Revenue Service (IRS) and the Department of Labor (DOL).

The fees charged by CPAs for retirement plan audits can range from $5,000 to $20,000. It may be tempting to shop for auditing services on price alone, but this approach can have long term consequences.

If your Form 5500 is considered incorrect or incomplete, it is subject to rejection and Plan Sponsors could be charged substantial civil penalties. In some cases, the penalties could even double the initial cost of your audit.

The IRS can charge you up to $25 per day, up to $15,000.

• The DOL can charge penalties of $300 per day until a complete Form 5500 is filed, up to $30,000 per year.

Full Scope Audits Are More Comprehensive Than Limited Scope Audits

The Limited Scope Audit option is available for retirement plans whose assets are prepared and certified by a bank or similar institution, or by an insurance carrier that is regulated, supervised, and subject to periodic examination by a state or federal agency that acts as a custodian or trustee. The Limited Scope option relies on the trustee or custodian holding the assets to provide certification that the investment information is accurate and complete. In a Full Scope Audit, everything in the plan, including the investments, is subject to audit testing. The Limited Scope Audit limits the information that is audited.

The Limited Scope Audit composes 65% of retirement plan audits, but it does not protect the participants, according to the former  Assistant Secretary of Labor Phyllis C. Borzi. Speaking at a recent conference of Certified Public Accountants, Borzi called the Limited Scope Audit “practically useless.” She also told the attendees that the primary auditors who are most likely to produce substandard audits are those who think their rate of compensation is inadequate.

Choosing a Retirement Plan Auditor

Here is a list of things you should review before choosing an auditor for your plan:

• Your auditor must be licensed/certified – Federal law requires that the auditor you engage must be licensed or certified as a public accountant by a State regulatory authority.• Your auditor must be independent – The auditor you choose should not have any financial interests in the Plan or the Plan Sponsor. The auditor must be able provide an objective, unbiased opinion about the financial condition of the Plan.

• Your auditor should be experienced – According to the Department of Labor (DOL) one of the most common reasons for deficient accountant’s report is the failure of the auditor to perform test in areas unique to qualified plans. Hiring an auditor with training and experience in performing qualified plan audits will make it more likely the auditor is aware of the special auditing standards and rules that apply to qualified plans. 

Check References Before Engaging an Auditor

• Ask about their work with other qualified plans.

• See if they are a member of AICPA’s Employee Benefit Plan Audit Quality Center. The Employee Benefit Plan Audit Quality Center helps auditors meet the challenges of performing quality audits in the complex areas of qualified plans.

• You may also wish to verify with the correct State regulatory authority that the auditor’s holds a valid, up-to-date license or certificate to perform auditing services.

When a Less Experienced Auditor Is Assigned to Your Plan

There will be some instances when a less experienced auditor may be assigned to perform the audit of your plan to reduce audit costs. When this happens, make sure that a more experienced manager or partner will be reviewing their work.

The Engagement Letter

Once you have chosen an auditor, a contract also known as an “engagement letter” will be provided by the auditor for review and approval.

The letter of engagement from your auditor should include:

• The work to be performed.

• The timing of the audit.

• The responsibilities of both parties.

Review the letter carefully and resolve any questions prior to engaging the auditor for a smoother auditing process. Many of our clients at EJReynolds, Inc. undergo an annual audit and we work with several quality audit firms. If this process is new to you, or if you are interested in speaking with a new auditor, please feel free to ask your plan’s administrator for a list of referrals.

The 10 most frequently asked questions about Fidelity Bond

  1. What is a fidelity bond?

A fidelity bond is a special type of insurance that protects plan participants from the risk of loss due to acts of fraud or dishonesty by plan officials.

  1. Is a fidelity bond required for my plan?

Generally, yes. With limited exceptions, all qualified plans (i.e. 401(k) plans, profit sharing plans, ESOPs, certain 403(b) plans, etc.) are required by law to be covered by a fidelity bond.

 

  1. Which types of plans are not required to have a fidelity bond?

Plans that are exempt from certain provisions of ERISA are not required to be covered by a fidelity bond. These plans include “one-participant” plans (i.e. plans that only cover the owner of a business (or the owner and his or her spouse), or only the partners of a partnership (or the partners and their spouses)), governmental plans, most plans sponsored by churches, and 403(b) plans that meet certain requirements.

 

  1. Who must be covered by the fidelity bond?

The plan must be the named insured; however, each person who “handles” plan assets must be covered by the bond. A person is considered to “handle” plan assets if his or her responsibilities are such that plan participants could incur a loss if he or she were to commit an act of fraud or dishonesty with respect to the plan.

 

  1. How is the amount of required coverage determined?

In general, the fidelity bond must be equal to at least 10% of plan assets as the beginning of each plan year, subject to a minimum bond amount of $1,000 and a maximum of $500,000 ($1,000,000 for plans that hold employer securities).

 

Note: Plans that hold more than 5% of Plan assets in “non-qualifying assets” (e.g. limited partnerships, third-party notes, collectables, real estate, mortgages, etc.) are subject to additional requirements.

 

  1. Can the plan be covered under the company’s general policy?

Yes; this is permissible provided that all of the necessary conditions are satisfied. For example, the plan must be a named insured, and the policy may not have a deductible (at least with respect to the portion of the policy covering the plan).

 

  1. Can a fidelity bond cover more than one plan?

Yes; each plan must be a named insured and assets under each plan as of the beginning of the plan year must be considered when determining the required coverage amount.

 

  1. Is a fidelity bond the same thing as fiduciary insurance?

No; fiduciary insurance provides protection for fiduciaries individually (rather than plan participants) in the event a legal claim is made against a plan fiduciary for a breach (or alleged breach) of their fiduciary responsibilities.

 

  1. Can the cost for the fidelity bond be paid for from plan assets?

Yes; the plan can pay for the fidelity bond assuming the plan permits for payment of plan expenses (which most do).

 

  1. Is there a penalty or fine if a plan doesn’t have coverage?

There isn’t a specific penalty or fine under the regulations; however, the amount of the bond must be reported on the plan’s Form 5500 each year which is filed with the Department of Labor (DOL).

 

If the plan is not covered by a fidelity bond, or if coverage not sufficient, this could certainly raise a “red-flag” and prompt an unwanted plan audit by the DOL or Internal Revenue Service.

 

If you would like to learn more about these rules, please contact us and we will be happy to assist you.