Brookings Institution Senior Fellow Recommends Changes to Proposed Regs on Automatic Contribution Arrangements

From: Iwry, J. Mark [mailto:iwryj@sullcrom.com]

I appreciated your gracious remarks to the American Bar Association last week characterizing me as the "father" of automatic enrollment. (I also appreciated, though not quite so much, your alternative characterization of me as the "grandfather" of automatic enrollment.) ;-)

Given my paternal feelings toward sections 401(k)(13) and 414(w), here, for your and your colleagues' consideration, are four recommendations regarding issues raised by or implicit in the proposed automatic enrollment regulations under those sections:

1. Make clear that plans may offer permissible withdrawals without using QDIAs.

2. Make clear that plans may offer permissible withdrawals even if they limit automatic enrollment to new hires (without extending it to existing employees who have made no affirmatively elections).

3. Make clear that plans may adopt permissible withdrawals after the start of a plan year (with the notice period running backward from the mid-year effective date of the permissible withdrawal feature).

4. Make clear that plans may periodically (whether once a year, once every two or few years, or on an irregular periodic basis) automatically enroll existing employees who previously affirmatively opted out.

At this point, I am submitting these four recommendations on my own behalf and without accompanying commentary or explanation. Detailed written comments on these and other issues can be expected to be submitted on behalf of one or more organizations by the comment deadline. However, while each of these issues should be addressed, in my view, in the final regulations, all four are time sensitive because plan sponsors' uncertainty or concern about them may be significantly inhibiting the use of automatic enrollment (and hence the expansion of 401(k) participation) now, in early 2008.

Accordingly, the Treasury/IRS might be able to make its position on at least the first and perhaps the second issue publicly known through the Labor Department's imminent Q&A guidance following up on its QDIA regulation. There is reason to believe that DoL may be receptive to including a statement in their guidance or in a preamble to their guidance to the effect that the DoL has been advised by Treasury and the Service that their position on that first issue is [whatever Treasury/IRS specify]. (This would "return the favor" insofar as Rev. Ruls. 98-30 and 2000-8 included footnotes -- as you recall -- regarding DoL's then positions on automatic enrollment.)

The suggested interpretation of IRC 414(w) as not being conditioned on the use of QDIAs would not only be parallel to but, in my view, should defer to and be based on

(i) DoL's interpretation (in paragraph (e) of and the preamble to its final QDIA regulations) of ERISA 514(e) as not being conditioned on the use of QDIAs and, more importantly,

(ii) DoL's characterization and interpretation of its final ERISA section 404(c)(5) regulations as including (in paragraph (e)) more than the QDIA provisions (in paragraphs (a)-(d)).

In addition, several of these clarifications or positions are appropriate for reflection in technical corrections (and one is in the pending technical corrections bill). However, I believe these issues can be clarified or resolved without awaiting technical corrections and without exceeding the authority of Treasury and the Service to interpret the statute appropriately.

In part because the comment period on the proposed regulations remains open, I am sending you this message in order that it may be passed on to the Service's regulation comment file and OTP's office that arranges for correspondence with Treasury to be made publicly available, with a view to informing others who may be interested in the proposed regulations of this communication.