This starts a new series of blog posts…Things I Worry About. I will number these, but they will be more episodic than sequential.

SECURE Act 2.0 was enacted on December 29, 2022. Among its provisions is a requirement that “new” 401(k) plans and private sector 403(b) plans must automatically enroll their eligible employees, but not until the first plan year beginning after December 31, 2024. Since most participant-funded and participant-directed plans, such as 401(k)s and 403(b)s, operate on a calendar year, this article discusses the effective date as if it were for the 2025 calendar year—just over two months from now.

SECURE 2.0 defines a “new” plan as one established on or after its enactment date—December 29, 2022.

In effect, the law has two effective dates. The first is that the 401(k) or private sector 403(b) plan must have been established on or after December 29, 2022 and the second is that those plans are not required to begin automatically enrolling until January 1, 2025. (A plan established after December 31, 2024 will need to automatically enroll their eligible employees immediately.)

So, while there shouldn’t be any confusion in the future, I am worried that plans established between December 29, 2022 and now may not realize that they need to start automatically enrolling their eligible employees on January 1, 2025.

Hopefully, plan advisors and providers are warning those clients, but even then, there could be some failures.

If a plan sponsor fails to automatically enroll employees and the failure is due to a reasonable administrative error…and it is found and corrected on a timely basis (under new relaxed SECURE 2.0) rules, the damage should be relatively small…mainly contributing the missed matching contributions (plus missed earnings). On the other hand, if not timely identified and corrected, it will be more expensive. I will address the details of correction in a future post.

Another concern it that the exception for new businesses expires over time. One a new business has existed for three years, it is no longer exempt from the requirement to automatically enroll. At that time, the plan must begin automatically enrolling the eligible employees. Hopefully, the providers for these plans are tracking the three years and notifying the businesses of the need to begin automatically enrolling their eligible employees. While it is primarily the obligation of the plan sponsors to keep their plans in compliance, the reality is that most plan sponsors, and particularly smaller employers,  are not knowledgeable about these technical retirement plan requirements.

A third concern is about the exception for small employers. Once a small employer “normally” employs more than 10 employees, it is no longer a small employer and thus no longer eligible for the exception from the requirement to automatically enroll. However, in this case, the requirement is not effective until one year after the year in which the plan sponsor normally employs over 10 employees. That one-year delay will give providers time to alert the affected plan sponsors of the need to begin automatically enrolling their eligible employees. Hopefully, that will minimize the likelihood of inadvertent failures.

One other requirement—which hasn’t been publicized much—is that, to satisfy these qualification rules, any participants who are automatically enrolled “must” be invested in a QDIA, or qualified default investment alternative, as defined in the 404c-5 regulation. For pre-enactment plans—automatically enrolled or otherwise—it is a fiduciary safe harbor to use QDIAs for defaulting participants, but it is not a qualification rule. For the new automatically enrolled plans, it is a qualification requirement. That should not present compliance issues, though, since plans almost always use QDIAs for defaulting participants in any event. However, there is at least some chance of a compliance failure where a plan does not have an eligible QDIA default investment and/or the required notices are not given. Since this is a qualification issue, it would ordinarily be handled by the plan’s third party administrator or recordkeeper….but it is the plan’s investment adviser that recommends the investments so there is a chance that this requirement could “fall between the cracks” of the service providers.

Concluding Thoughts

I am worried that some post-enactment plan sponsors will inadvertently fail to automatically enroll their employees on January 1, 2025. While the obligation to operate retirement plans in a compliant manner is on the plan sponsors, the reality is that they rely on their advisors and providers to support them.

It is better to avoid a problem than to fix one, so the retirement plan industry should make every effort to communicate the requirement as effectively as possible.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Faegre Drinker.