Employers Test Auto ‘Catch-Up’ Contributions

A number of retirement plan sponsors are taking advantage of a little-known provision of the Pension Protection Act that allows them to automatically step up older employees’ 401(k) contributions to take advantage of the “catch-up” limit available to workers 50 and older.

The pension law, passed in August, permitted employers to automatically enroll employees into their 401(k) plans and step up their contribution rates on an annual basis. The legislation also allowed for companies to use specific types of funds as the default option in their plans.

Under 401(k) law that already was in place, employees can contribute $15,500 into their 401(k) plans annually, but employees 50 and older can put another $5,000 into their plans. The idea is to give these employees a chance to catch up on their retirement savings.

But few companies are seeing employees take advantage of this provision, says James Cornell, senior vice president of employer marketing at Fidelity Investments. On average, companies see a 9.8 percent adoption rate of the provision by employees, he says.

“Employers looked at their participant basis and saw that many of those employees approaching retirement weren’t going to be ready,” Cornell says.

In response to that scenario, Fidelity is conducting a pilot program with 25 employers, allowing them to offer “automatic catch-up,” he says. The employers participating in the pilot represent all com­pany sizes and are implementing the program differently, Cornell says. Some companies are automatically setting aside up to 10 percent of employees’ pay in their accounts, he says.

So far, the feedback has been positive, Cornell says. There were two main concerns expressed by employers. The first was how participants would react, which has not been an issue, he says. Companies were also concerned they’d be assuming more fiduciary risk by offering the auto catch-up provision.

“This gets a bit complicated and we urge employers to work with their consultants and in-house counsel,” he says. “But basically the PPA provides a safe harbor up to 10 percent,” meaning that most companies should be fine as long as the employee isn’t contributing more than 10 percent of his or her salary into the 401(k) plan, he says.

But a lot of employers may be hesitant to offer this kind of automatic program for fear of seeming too paternalistic, says Don Stone, president of Plan Sponsor Advisors, a Chicago-based advisory firm.

“Conceptually this makes sense. But my guess is that you won’t see a lot of plan sponsors choose it because they will say that anyone who is old enough and is already at the point of contributing and maxing out their normal contribution rates are able to make these kinds of decisions for themselves,” Stone says.

But a lot of companies have built a culture of looking after their employees, and this falls into that concept well, says Rick Meigs, president of 401khelpcenter.com.

“If plan sponsors do this, they just need to make sure they communicate really well and let employees know what’s going on,” he says.

Fidelity is evaluating the pilot program and will make a decision in the next several weeks about whether it will offer it to all plan sponsors, Cornell says.

—Jessica Marquez