Automatic Enrollment

1
Automatic Enrollment Qualified Default
Investment Alternatives After The Pension
Protection Act

• Presented for the Western Pension and Benefits
  Conference
• Wednesday, March 12, 2008
• Erwin D. Kratz Director and Shareholder,
  Fennemore Craig, PC, Tucson, Arizona

2
Automatic Enrollment in 401(k) Plans

• Preempts State laws prohibiting withholding
  without written consent
• Must apply uniformly
• Notice Requirements
• Comply with QDIA Regulations
• New Safe Harbor Option Can be Coupled With
  Automatic Enrollment

3
New Automatic Enrollment Nondiscrimination Test
Safe Harbor

• In addition to the existing safe harbor
• Effective for plan years starting after December
  31, 2007
• Has 4 basic features
• (1) automatic deferral
• (2) minimum matching or non-elective contribution
  
• (3) investment of auto deferrals is in accordance
  with regulations
• (4) notice requirements

4
Automatic Deferral

• Default automatic deferral percentagemust be
  applied uniformly
• Cannot exceed 10
• Must be at least
• 3 until the end of the first full plan yearof
  eligibility
• 4 in the second full plan year
• 5 in the third full plan year
• 6 in the fourth full plan year and thereafter
• EEs must be able to opt out.
• Does not have to apply to EEs who have already
  made elections.

5
Matching or Non-elective Contributions

• Employer must either make
• a 3 profit sharing contribution or
• matching contributions - 100 of the first 1 of
  compensation deferred, plus 50 of the next 5 of
  compensation deferred (i.e. from 1-6).
• matching rate can be more generous than the
  specified minimum, but cannot exceed 6 of
  compensation and must be the same for NHCEs as
  for HCEs
• ER contribution can have a 2 year vesting schedule

6
Qualified Default Investment Alternatives

• Final regulation providesfiduciary protection to
  a plan fiduciary who invests automaticallydeferr
  ed employee contributions in accordance with the
  regulations
• Deems the affected participant to have exercised
  control over the assets, which relieves the
  fiduciary of responsibility for the investment
  decision

7
The regulations conditions for fiduciary relief

• Assets must be invested in a qualified default
  investment alternative (QDIA)
• Participants and beneficiaries must have been
  given an opportunity to provide investment
  direction, but failed to do so
• Any material, such as investment prospectuses,
  account statements, proxy voting material and
  other notices provided to the plan by the QDIA
  must be furnished to participants and
  beneficiaries
• Participants and beneficiaries must have the
  opportunity to direct investments out of a QDIA
  with the same frequency available for other plan
  investments but no less frequently than
  quarterly, without financial penalty
• The plan must offer a broad range of investment
  alternatives as defined in the Departments
  regulation under section 404(c) of ERISA

8
A QDIA may be

• A life-cycle or targeted-retirement-date fund
  thatis a mix of equities and fixed
  incomeinvestments based on the participants age
• A balanced fund that is a mix of equities and
  fixed income investments that is consistent with
  a target level of risk appropriate for
  participants of the plan as a whole (i.e., not of
  the particular participant)
• A professionally managed account that allocates
  assets to equities and fixed income investment
  options available under the plan based on the
  participants age or normal retirement date.

9
QDIAs, cont

• If a 401(k) plan uses automatic enrollment, for
  the first 120 days after a participants first
  automatic elective contribution, certain money
  market or stable value funds
• For funds invested before December 24, 2007,
  certain bond funds qualify as a grandfathered
  QDIA

10
Notice Requirements

• 30 days before each plan year, and before initial
  eligibility, every employee must be given a
  notice containing
• A description of the circumstances under which
  assets will be invested in a QDIA.
• An explanation of the circumstances under which
  automatic elective contributions will be made,
  the percentage of such contributions, and the
  right of the participant to elect not to have the
  contributions made (or to elect to have them made
  at a different percentage)
• A description of the investment objectives, risk
  and return characteristics, fees and expenses of
  the QDIA
• A description of the right of participants to
  direct investment of the QDIA assets to other
  investment options under the plan and
• An explanation of where the participants can
  obtain investment information concerning the
  other investment alternatives available under the
  plan.