Automatic enrollment and governmental 457(b) plans

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.  

A recent call with an advisor in Pennsylvania focused on governmental 457(b) plans and automatic enrollment. The advisor asked: Myclient maintains a governmental 457(b) plan. The plan’s recordkeeper told us they cannot add an auto enrollment provision to the plan because state law prohibits it. Is that true?”

Highlights of the Discussion

For governmental 457(b) plans in Pennsylvania, that is true, unless it is a collectively bargained plan.1 Based on our reading of Pennsylvania state law, automatic enrollment is not allowed unless authorized by an employees’ written authorization or pursuant to a collective bargaining agreement (34 Pa. Code §9.1). 

Generally, automatic enrollment is available for governmental 457(b) plans, but state law will dictate whether a particular state will allow it. The issue revolves around having written authorization to withhold amounts from an employee’s pay.  

Automatic enrollment was universally authorized in the private sector more than a decade ago through the Pension Protection Act of 2006. However, public sector defined contribution plans were not included in the legislation. For public sector plans, each state is responsible for determining whether it will allow automatic enrollment, and many states have laws preventing its establishment. 

According to the National Association of Governmental Defined Contribution Administrators (NAGDA), nine states allow automatic enrollment, 25 states do not allow automatic enrollment and 16 states allow “some” automatic enrollment.2  For example, Texas is a state that is reported to allows some automatic enrollment. Texas law states: “Employees participating in the state plan are automatically enrolled. However, public employees of other political subdivisions are subject to wage deferral laws that prevent the implementation of automatic enrollment.”3

Conclusion

Whether a governmental 457(b) plan can include an automatic enrollment feature depends on state law. For specific questions on a particular state, seek legal guidance from a professional who is well-versed in that state’s statutes.