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WASHINGTON--For the first time, newly proposed Labor Department rules would protect employers from fiduciary liability if they automatically enroll employees in 401(k) and other participant-directed defined contribution plans and contribute a portion of employees' salaries to specified investment options.
The rules, mandated by Congress as part of pension funding reform legislation passed in August, provides guidance on steps employers must take to auto-enroll employees in defined contribution plans and be shielded from liability for the investment decisions they make on behalf of employees.
Auto enrollment programs address a widespread problem: employees who haven't told their employer whether they will participate in the 401(k) plan. In some cases, as many as 20% of employees don't say one way or another if they will participate.
To address that problem, roughly 25% of large employers, according to benefit consultant Hewitt Associates Inc., and 18% of all employers, according to the Labor Department, offer automatic enrollment programs.
Those programs are expected to increase significantly over the next few years as more employers freeze their defined benefit plans and their 401(k) plans become the sole source of employer-provided retirement income. Without automatic enrollment, many employees may lack sufficient retirement income simply because they didn't sign up for their employers' 401(k) plan.
"We need to get employees into these plans," said Pam Hess, a Hewitt consultant in Lincolnshire, Ill.
"The growth of these programs really will accelerate," said Michael Weddell, a consultant in the Southfield, Mich., office of Watson Wyatt Worldwide.
Until now, though, employers have had little guidance on how these programs can be structured. In the absence of such guidance, many employers, concerned they could be sued by employees if the investments they make on the employees' behalf perform badly, have taken conservative investment approaches, such as investing contributions in a low-yield but low-risk money market fund.
The Labor Department's proposed rules, though, would give other investment options for so-called default funds to which employers could direct contributions on behalf of employees that have been automatically enrolled in 401(k) plans.
Those options are:
Just offering these investment options by themselves would not be a shield against liability. Employers still would have to be prudent in their selection of investment funds and would continue to monitor the funds.
Employers also would have to allow employees targeted with automatic enrollment programs to opt out of the program.
Additionally, employees in automatic enrollment programs must be given the opportunity to direct investments out of a default investment alternative with the same frequency as for other plan investments, but no less than quarterly, without financial penalty.
Some benefit experts say the proposed rules, by providing new guidance, will further accelerate the adoption of automatic enrollment programs.
"The rules will certainly help," said Watson Wyatt's Mr. Weddell.
Some experts, though, are surprised that fixed income funds were not included as a default investment option. "Strategically, the proposal goes in the right direction. But tactically, I have problems," said Rich Koski, a managing director with Buck Consultants L.L.C. in Secaucus, N.J.
"A stable value fund would be a good default investment option," Mr. Koski said.
Nothing, though, would prevent an employer from offering a stable value fund as a default investment in an automatic enrollment program. The employer, though, would not receive the fiduciary liability shield.
While automatic enrollment programs--even in the absence of regulatory guidance--have been growing, not all employers have embraced them. For example, Hartmarx Corp. has been able to get 90% of eligible employees--about 20 percentage points more than the average employer--to enroll in its 401(k) plan through an aggressive communication and employee contact program, said Michael Pikelny, employee benefits manager and corporate actuary for the Chicago-based clothing manufacturer.