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Labor Department Proposes Automatic Enrollment Regulations

Washington, DC, September 28, 2006 – The Labor Department’s Employee Benefits Security Administration (EBSA) recently proposed a regulation that would govern the default investments established by companies that automatically enroll their employees in employer-sponsored defined contribution plans, such as 401(k) plans.

Background
On August 17, 2006, President Bush signed into law the Pension Protection Act of 2006, which removed several impediments to automatic enrollment in 401(k) plans. Among other things, the act amends the Employee Retirement Income Security Act (ERISA) to provide a safe harbor for plan fiduciaries investing participant assets in certain types of default investment alternatives in the absence of participant investment direction. The regulations proposed by EBSA are intended to implement the amendments introduced in the Pension Protection Act.

Among other things, the regulation deems a participant to have exercised control over assets in his or her account if, in the absence of investment direction from the participant, the plan fiduciary invests the assets in a qualified default investment alternative. A qualified investment alternative must satisfy certain requirements, including:

  • it may not impose financial penalties or otherwise restrict the ability of a participant or beneficiary to transfer the investment from the qualified default investment alternative to any other investment alternative available under the plan;
  • it must be either managed by an investment manager, or an investment company registered under the Investment Company Act of 1940;
  • it must be diversified so as to minimize the risk of large losses;
  • it may not invest participant contributions directly in employer securities; and 
  • it may be a life-cycle or targeted-retirement-date fund, balanced fund, or professionally managed account.

ICI Position
In a September 2005 letter to the Labor Department, the Institute expressed strong support for efforts to encourage automatic enrollment in 401(k) plans, citing ICI research that demonstrates that automatic enrollment dramatically increases participation in these types of plans, particularly among lower income workers, and improves employees' retirement preparedness. ICI’s study also demonstrated that the type of default investments selected by employers as part of automatic enrollment programs can have a significant impact on participants' 401(k) accumulations at retirement.

The Institute recommended that the Labor Department issue guidance urging plan sponsors to create default investment options that are well-diversified and structured in a way that takes into account each participants' expected date of retirement.  

Related Links
Sections of this website are devoted to retirement security issues and ICI research focusing on the retirement plan market.