Mandatory Enrollment Now You See It, Now You Dont

By Doug Halonen

May. 20, 2009

There won’t be mandatory automatic enrollment for 401(k) plans—at least for now.

The proposal was not included in President Barack Obama’s fiscal 2010 budget, as many had been hoping.

“If the administration is not going to proactively support it, I don’t think it’s anything we’re going to see anytime soon,” says Elizabeth Varley, managing director of government affairs at the Securities Industry and Financial Markets Association in Washington. SIFMA opposes an automatic 401(k) enrollment requirement.

But some industry executives say they still see a future for a proposal that could dramatically increase the number of employees participating in employer-sponsored defined-contribution plans. Under existing Department of Labor rules, the decision on offering automatic enrollment is voluntary for employers.

“I still think we are going to see legislation, but it looks like we won’t see it right away,” says Robert Holcomb, vice president of legislative and industry affairs at JPMorgan Retirement Plan Services in Kansas City, Missouri.

Mandatory auto enrollment was in Obama’s 2010 budget blueprint released in late February and confirmed by Thomas E. Gavin, spokesman for the White House’s Office of Management and Budget.

But in a May 14 interview, Gavin conceded the proposal had been dropped for now.

An administration source who asked not to be identified says the proposal was deleted from the budget because Treasury Department executives—including J. Mark Iwry, the newly appointed deputy assistant Treasury secretary for retirement and health care policy and senior advisor to Treasury Secretary Timothy Geithner—wanted to focus first on creating an automatic individual retirement account. The IRA proposal is in the budget.

Before joining the Treasury Department, Iwry developed and championed the concept of requiring employers that don’t offer retirement plans to enroll their employees in an automatic IRA.

“The administration is not proposing to require auto enrollment in 401(k) plans,” Iwry says. He declined to say why.

“The administration is committed to expanding savings for as many people as possible,” the OMB’s Gavin says. “The automatic IRA would be a first step, but certainly not the last.”

Inclusion of automatic enrollment in Obama’s budget blueprint surprised many pension industry officials, administration executives outside the White House and OMB, and key lawmakers. Industry lobbyists say it was deleted in response to concerns that it would represent a major mandate in what has otherwise been a voluntary retirement system.

In fact, some say the auto enrollment proposal was never in the budget in the beginning.

“It was never actually in the budget,” says Dallas Salisbury, president and CEO of the Employee Benefit Research Institute in Washington. He says his own White House sources confirmed that when the president’s budget blueprint was issued.

But Ed Ferrigno, vice president of Washington affairs for the Profit Sharing/401k Council of America in Chicago, says the auto enrollment proposal was in the blueprint. “There was no doubt that it was in and there’s no doubt that it’s out.”

Paul Schott Stevens, president and CEO of the mutual fund industry’s Investment Company Institute in Washington, says that while ICI executives believe lawmakers might eventually want to consider a mandatory 401(k) enrollment requirement, the institute believes they should proceed cautiously.

“If you mandate auto enrollment today, the effect will be to put more pressure on more employers to reduce or eliminate their match, and that will ultimately disserve employees, not serve them,” Stevens says.

Even JPMorgan’s Holcomb says his company’s support for a mandate is conditioned on ensuring that it wouldn’t cause undue administrative burdens for plan sponsors.

“We are generally supportive of anything that will help encourage participation in defined-contribution plans, but we always want to look at how it’s implemented to make sure it’s administratively feasible,” Holcomb says.

“It [an auto 401(k) mandate] is controversial,” SIFMA’s Varley says. “I think people [already] see a very nice steady increase in the number of people adopting automatic enrollment. We don’t need to shove employers into doing it.”

In the section dealing with the automatic IRA proposal, Obama’s budget seeks as much as $1 billion to establish a federal organization to oversee the proposed plan.

The OMB’s Gavin says the agency could be established as a stand-alone entity, or as part of an existing government agency. Details will be hashed out in the coming months.

The automatic-IRA agency would carry a $200 million startup price tag in 2010 and up to $1 billion in federal support over time, according to details disclosed in the budget.

“We’re trying to make sure that we anticipate all of the program’s potential needs,” Gavin says.

The administration “has clearly placed a high premium on establishing the auto-IRA program,” says David John, a senior research fellow at the Heritage Foundation in Washington and one of the co-creators of the original auto-IRA proposal.

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