Auto Enrollment an Opportunity for Church Plans

Church plan legislation provides an immediate opportunity for plan sponsors to affect participant outcomes through auto enrollment; the effect of other provisions remains to be seen.

Section 336 of the Protecting Americans from Tax Hikes (PATH) Act (S. 2029), which was passed as part of the recent budget deal signed into law by President Obama on December 18, 2015, contains a number of significant provisions affecting church plans.  

The measure addresses each of the five issues in bills previously introduced to Congress by lawmakers, including controlled group rules, grandfathered defined benefit (DB) plans, automatic enrollment in church defined contribution (DC) plans, transfers between 403(b) and 401(a) plans, and investing in collective trusts.

Sources PLANSPONSOR spoke to said that the provision allowing church plans to offer automatic enrollment, which preempts any state laws, will have the biggest impact on church plans.

Joy Roberts, leader of the relationship management group that works with plan sponsors at GuideStone Financial Resources in Dallas, tells PLANSPONSOR, “We were extremely pleased when the legislation was passed. It gives our church plan sponsors the ability to increase employees’ savings opportunity, and it levels the playing field for church plans compared to Employee Retirement Income Security Act (ERISA)-governed defined contribution (DC) plans.”

Caroline Burks, department head of compliance at GuideStone Financial Resources in Dallas, explains that whenever a client would approach GuideStone about wanting to implement automatic enrollment in their DC plans, GuideStone would tell them they need to look at state laws to see if they could do that. The company has had churches and other plans not subject to non-discrimination testing express interest in auto enrollment. “Some have already implemented it, but some have been reluctant because of having to research state law,” she says.

Burks notes that at the end of last year, the Internal Revenue Service (IRS) issued guidance that made it easier to correct for auto enrollment errors. “That, coupled with the new legislation preempting state laws, gives us a good message to bring to our clients that makes auto enrollment less daunting,” she says.

NEXT: The administration and cost considerations

Thomas Macaluso, enrolled actuary and vice president and actuary as well as practice leader of the church plan practice at USI Consulting Group in New York City, says the auto enrollment legislation is interesting for church plan sponsors because these organizations seem to be going through changes similar to the corporate world, where they are shifting from defined benefit (DB) plans to DC plans. “Many [church organizations] went through an exhaustive effort to get their DC plans in order, but auto enrollment is something they may or may not have focused on,” he says.           

He thinks there may be a couple of things that may make church plans hesitant to implement auto enrollment. For example, Catholic dioceses have multiple employers and multiple locations and no centralized payroll system, so it could be hard to get auto enrollment set up with providers. In addition, church plans are very paternalistic and may not want to offer auto enrollment to lower-paid individuals. Roberts says small churches also may find it difficult to administer because of limited internal resources.

But, in general, Macaluso thinks there will be an uptake of auto enrollment among church plans. “We have surveyed dioceses, and in the past couple of years have asked about auto enroll,” he says. “About 20% say they offer it, but we think we’ll see that increase after this as plans continue to modernize themselves and more switch to DC plans.”

Burks says costs are considerations that plan sponsors have to weigh, but there is also the stewardship responsibility they have to help employees prepare for retirement. When consulting with clients, GuideStone does think about that added administration and match contribution costs.

“We go through the same approach of trying to identify plan objectives and goals as those who help corporate plan sponsors,” Roberts says. “The best way to engage employees is through plan design and auto features, but we do consider the financial impact of a plans goals and objectives.” She says GuideStone expects larger and non-qualified church controlled organizations (Non-QCCOs) that thought it was legally daunting will want to adopt auto enrollment now. “It won’t happen overnight, but we have two or three clients right away talking about it in the new year.”

Macaluso suggests that before deciding to implement auto enrollment, church plan sponsors need to do a cost analysis. “Especially with organizations that are holding on to a DB plan that is not fully funded, they need to manage what will need to be provided in matching contributions to the DC plan and what they need to do to fund the DB plan,” he says. He notes that some plan sponsors don’t realize that if they freeze their DB plan, they will still have to fund and administer that plan.

NEXT: Additional provisions of the church plan legislation

The legislation includes a provision that allows assets of a church plan described in section 401(a) of ERISA to be transferred to a 403(b) plan. Burks says GuideStone was also excited about this provision because it has clients that were sold a 401(a) plan that didn’t understand the benefits of sponsoring a 403(b) rather than a 401(k) plan. “These clients that have a 401(k) and want to establish a 403(b)(9) plan, won’t have two plans to maintain. We will look at this provision more closely to see how we can help clients,” she says.

Previously, the controlled group rules for tax-exempt employers may have required certain church-affiliated employers to be included in one controlled group (i.e., treated as a single employer), even though they have little relation to one another. But, the new legislation lays out specific guidelines for determining what employers are part of a controlled group. While the legislation states that none of its provisions is intended to have, or appears to have, any impact on the ongoing litigation against church-related hospitals over the church plan definition, one does wonder if this could provide a test for determining if an entity is a church-affiliated organization.

Macaluso says controlled group rules could be a measure of relationship for the ongoing litigation, but that remains to be seen. “We do have church clients that have these types of entities that a long time ago were obviously part of the church, but may now be questionable. We are going to sort through all the rules, because we think there could be some impact,” he says. He adds that it is prudent for organizations to think they might have an issue worth reviewing with an attorney.

The legislation also included a provision that church plan investment boards may now be able to invest in collective trusts. Plan sponsors in the corporate world are increasingly turning to collective trusts as a way to simplify and cut costs. But, interestingly, it was difficult to find sources that wanted to speak about the potential benefit this could provide church plans, making one wonder from where lawmakers got the idea to push this provision.

Macaluso says he knew there was some debate about it, but USI doesn’t have a lot of experience with collective trusts and hasn’t had any clients trying to invest in them. Burks also tells PLANSPONSOR GuideStone clients are not asking about the ability.

However, in general, Macaluso thinks this legislation presents a good opportunity for church plan sponsors and advisers to consult about getting DC plans in order. A number of church plans still have multiple vendors providing investments; reviewing investments could reveal opportunities to reduce fees. And, they should discuss auto enrollment, as well as the opportunity to obtain more services and reduced fees as plan assets grow due to auto enrollment, he concludes.