Title
AUTO-ENROLLMENT OF NEW EMPLOYEES IN DEFERRED COMPENSATION PROGRAM.
Presented by: Chris Chronis, Chief Financial Officer.
RECOMMENDED ACTION: Adopt the procedures for auto-enrollment of new employees in the deferred compensation program and authorize execution of an Automatic Enrollment Services Election Form.
Body
In 2007 the BOCC adopted the attached Section 457(b) Deferred Compensation Plan and Trust Agreement ("Plan Document'), thereby establishing a supplemental retirement program for use by county employees. The 2007 Plan Document replaced one that had originally been adopted about 35 years earlier. It sets the ground rules for employee eligibility and participation in the program. Much like more commonly known 401(k) programs in the private sector, the 457(b) program enables county employees to divert a portion of their county pay to an investment account and, depending on choices made individually by each participating employee, avoid paying income taxes on the diverted income until it is withdrawn after age 59½ or avoid paying income taxes on all investment income earned by the investment account.
Participation in the deferred compensation program is important. Many employees don't work for the county long enough to earn a pension from KPERS or KP&F, and so money set aside in the 457(b) plan may be the only retirement income other than Social Security available to them based on their years of service here. Even for employees who do work long enough to earn a KPERS or KP&F pension, the benefit provided by those plans is too small, even when combined with Social Security, to enable a standard of living similar to that enjoyed before retirement.
Yet participation in the deferred compensation program is low. Like people everywhere, once many county employees grow accustomed to a certain amount of take-home pay they find it difficult to scale back their personal expenses in order to divert income to a retirement account. Only about 31% of eligible employees currently divert pay to a deferred compensation account, and the average account balance of participating employees is less than $30,000.
To make it easier for employees to save for retirement, Section 2.05(b) of the Plan Document provides for automatic enrollment, subject to established procedures and applicable laws. Such procedures never have been adopted so automatic enrollment never has been implemented. Instead, commencement of participation in the deferred compensation program has been available only pursuant to Section 2.05(a) of the Plan Document, pertaining to voluntary enrollment.
The recommended action would provide for automatic enrollment of new county employees otherwise eligible to participate from their date of employment. One percent of their pay would automatically be diverted to an investment account created for them. Employees would have a variety of options for managing their investment accounts. They could self-direct investments in any of the mutual funds (currently 30 in number) offered by the plan, they could purchase investment advice from the designated adviser of the program, or they could pay to have their account professionally managed. Unless and until they specify otherwise, their account would be invested in mutual funds targeted for individuals of their approximate ages. These funds are more commonly referred to as Target Date Funds. The Target Date funds are the default investment option for the Plan. Currently, if a participant enrolls in the plan and does not indicate an investment choice, their contributions will be directed to the appropriate Target Date Fund. This choice will remain in effect until the participant changes it.
Within 30 days of their first pay date, automatically enrolled employees could opt out of the deferred compensation program without suffering any IRS penalty for early withdrawal. Employees opting out within the 30-day window would receive all of their diverted pay and would be liable only for ordinary income taxes on it. After the 30-day window has expired, automatically enrolled employees would have the same options for opting out as voluntary participants:
1. they could direct that their account be frozen and no additional pay be diverted, in which case they would continue to have an investment account, but it would grow only as investments appreciated;
2. they could direct that their account balance be transferred to another qualified retirement plan, such as a 401(k) they might have established with a prior employer, in which case their account balance would be rolled over to their other plan without tax or penalty, or
3. the could direct that their account be closed and the balance be paid to them, in which case they would be liable for ordinary income taxes on the account balance as well as substantial federal penalties imposed by the IRS for early withdrawal.
Initially, automatically enrolled employees will participate at the rate of 1% of their gross bi-weekly pay. At the start of the first plan year that begins after they've been in the program for 12 months, their participation rate will increase to 2% of their gross bi-weekly pay. Thus, a new employee who is auto-enrolled in the plan as of March, 2014 would not be subject to the automatically increased participation rate until January, 2016. At the start of each plan year thereafter their participation rate will be increased one percentage point until their total participation rate is 6% of pay. At any time, employees will be able to direct that some different rate of their pay be diverted to their investment account, but they will be limited by the IRS to a maximum amount that will be $17,500 in 2014 (with additional amounts permitted for employees over age 50).
Newly hired employees eligible for auto enrollment will have approximately 60 days from their date of hire to "opt out" of the 457 plan and prevent any automatic payroll contributions to the Sedgwick County 457 plan. Eligible employees will be "touched" a minimum of three times with information regarding the 457 plan and the auto enrollment and opt out processes:
1. On the 1st day of employment a letter from Sedgwick County that explains auto-enrollment will be included in new hire paperwork;
2. During the weekly Monday morning new employee orientation (which typically occurs on the first day of employment) a Great-West representative will discuss the plan and employee options; and
3. Approximately 30 days prior to the auto enrollment effective date, Great-West will send all eligible employees a notice that includes information about how they can opt out of the auto enrollment, and a PIN number that allows such actions on-line.
Additionally, a Great-West representative will review the Plan and opt out process in monthly new employee orientation sessions, but not all new employees attend these these sessions.
If an employee does not opt out prior to a contribution being made via auto enrollment, they can request that their contributions be stopped. However, they will not be able to take distribution of their account balance until they incur a qualifying event. (severance of employment, hardship, death) Thus, the funds would remain in their account. The participant would have complete control over and ability to change how the money in their account is invested.
Alternatives:
The BOCC could decline to take the recommended action.
Financial Considerations:
The deferred compensation program is funded exclusively by employees through pay deferrals. No county funding is provided to match employee deferrals or to pay administrative costs.
Legal Considerations: The authority for this action is 26 U.S.C. 7805, Part 2, Section 2.457, et seq., 26 C.F.R. Part 1, and the Sedgwick County 457(b) Deferred Compensation Plan and Trust Agreement [Section 2.05(b)], dated September 4, 2007. A simple majority vote is required.
Policy Considerations:
Outside Attendees:
Multimedia Presentation: