This begins a new series of blog posts… Things that worry me. I will number them, but they will be more episodic than sequential.

The SECURE 2.0 Act was signed into law 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 before first plan year beginning after December 31, 2024. Since most participant-funded and participant-directed plans, such as 401(k) and 403(b) plans, operate on a calendar year basis, this article discusses the date entry into force as if it were the 2025 calendar. year – in just over two months.

SECURE 2.0 defines a “new” plan as a plan established as of its promulgation date, which is December 29, 2022.

Indeed, the law has two dates of entry into force. The first is that the private sector 401(k) or 403(b) plan must have been established as of December 29, 2022 and the second is that these plans are not required to begin automatic enrollment until January 1 2025. (A (the plan established after December 31, 2024 must automatically and immediately enroll its eligible employees.)

So while there should be no confusion going forward, I am concerned that plans established between December 29, 2022 and today will not realize that they must begin automatically enrolling their eligible employees on January 1, 2025 .

Hopefully advisors and plan providers warn these clients, but even then there could be failures.

If a plan sponsor fails to automatically enroll its employees and that failure is due to a reasonable administrative error…and that error is detected and corrected in a timely manner (under the new relaxed rules of SECURE 2.0), the damage should be relatively minimal… mainly contributing to the breaches. matching contributions (plus missed earnings). On the other hand, if it is not identified and corrected in time, it will cost more. I will cover the details of the fix in a future article.

Another concern is that the new business exception expires over time. Once a new business has been in existence for three years, it is no longer exempt from the automatic registration requirement. At that time, the plan must begin automatically enrolling eligible employees. Hopefully the providers of these plans follow up on the three years and notify businesses of the need to begin automatically enrolling their eligible employees. Although it is primarily the responsibility of plan sponsors to keep their plans in compliance, the reality is that most plan sponsors, and especially small employers, are unaware of these technical retirement plan requirements.

A third concern concerns the exception granted to small employers. Once a small employer “normally” employs more than 10 employees, it is no longer a small employer and therefore can no longer benefit from the exception to the automatic opt-in requirement. However, in this case, the requirement does not take effect until one year after the year in which the plan sponsor normally employs more than 10 employees. This one-year delay will give providers time to alert affected plan sponsors of the need to begin automatically enrolling their eligible employees. Hopefully this will minimize the likelihood of unintended failures.

Another requirement, which has not been widely publicized, is that, to satisfy these qualification rules, all automatically enrolled participants “must” be invested in a QDIA, or a qualified default investment alternative, such as defined in regulation 404c-5. . For pre-enactment plans – whether automatically enrolled or not – the use of QDIAs for defaulting participants constitutes a fiduciary safe harbor, but it is not a qualifying rule. For new auto-enrollment plans, this is a qualifying requirement. This should not cause compliance issues, however, since plans almost always use QDIAs for defaulting participants anyway. However, there is at least some risk of noncompliance when a plan does not have a qualifying QDIA default investment and/or required notices are not given. Since this is a qualification question, it would normally be handled by the plan’s third-party administrator or recordkeeper… but it is the plan’s investment advisor who recommends investments, so it is possible that this requirement “falls through the cracks” of service providers.

Final Thoughts

I am concerned that some post-adoption plan sponsors may inadvertently fail to automatically enroll their employees on January 1, 2025. Although the obligation to manage retirement plans in a compliant manner falls on plan sponsors, the reality is that they rely on their advisors. and service providers to support them.

It is better to avoid a problem than to solve it, which is why the pension industry must do everything possible to communicate this requirement as effectively as possible.