Section 101 of the SECURE 2.0 Act of 2022 (SECURE 2.0) requires many 401(k) plans established after December 29, 2022, to include an eligible automatic contribution arrangement beginning with plan years after December 31, 2024. The initial automatic enrollment deferral contribution amount upon participation must be at least 3% but not more than 10% (unless the member opts out or elects a different percentage). After the first year, the automatic enrollment rate must increase by 1% each year up to at least 10% but not more than 15% (unless the member opts out or elects a different percentage).

Generally, 401(k) plans established before December 29, 2022, governmental plans, church plans, and plans sponsored by certain new employers and small businesses are exempt from these mandatory automatic provisions. However, as enacted, this exemption does not apply to an employer that adopts a preexisting “plan maintained by more than one employer,” such as a multiemployer plan.

Conceptually, the automatic enrollment and automatic escalation provisions make a lot of sense to help individuals save for retirement. However, in practice these provisions create significant administrative challenges for multiemployer plans and will likely result in smaller retirement savings for plan members. We raised a red flag about this before SECURE 2.0 was passed into law.

How multiemployer plans operate

A multiemployer plan is a plan maintained in accordance with one or more collective bargaining agreements between one or more unions and multiple employers operating in the same or related industry. In many industries, such as the construction industry, which makes up a majority of multiemployer plans, a union member may work for many different employers going from one job site to another, potentially from week to week (or month to month, depending on how, where, and when they are dispatched).

All union members defer part of their hourly wage to various initiatives agreed to under the collective bargaining agreement (CBA) and wage allocation process. The “employer” contribution (i.e., CBA contribution) is simply a contribution negotiated between the union and employer that reduces the member’s hourly wage. Thus, an argument can be made that a multiemployer plan with an employer contribution already has an automatic enrollment provision because eligibility to receive it is typically based upon the first hour of work, with no conditions like those typically seen in corporate plans (i.e., hours requirement and/or employed on the last day of the plan year). Adding a 401(k) feature on top of this allows each union member to save more for retirement if desired. Figure 1 shows an example of how a typical wage package is constructed.

Note how the 401(k) deferral above is a fixed dollar amount, not a percentage. The vast majority of multiemployer 401(k) deferrals are based on a fixed dollar amount per hour rather than a percentage of pay. This dollar amount is specified by the individual union member and only changes at the election of the participant, not automatically.

Auto-enrollment and auto-escalation challenges for multiemployer plans

The auto-enrollment and auto-escalation provisions in SECURE 2.0 would increase the administrative complexity of 401(k) deferrals for multiemployer plans exponentially.

• As noted earlier, many workers move from job to job, working for several employers. Each employer has its own payroll provider, and there is no communication among participating employers or their payroll providers. Therefore, there is no way for a specific employer to track a member’s 401(k) deferral election as they move from job to job (this becomes even more complex when auto-escalation is factored into the administration of the benefit). Nor is there a seamless way to track whether a union member has “opted out” of the auto-enrollment or auto-escalation. In addition, many employers do not have a “local human resources (HR)” person or office at the job site as these sites are remote from the main office. As a result, there is no interaction with the union member who has been dispatched to the job site. Because one multiemployer plan could have hundreds of employers and equally as many different payroll providers, tracking thousands of members can become unwieldy very quickly.
• Administrative, audit, and recordkeeping costs will increase if auto-enrollment and auto-escalation provisions are required for multiemployer plans, which means the participants will absorb the costs. Because there is no communication among employers, errors in deferrals will more than likely go undetected. The errors that are found will be identified by the member, who may notice a discrepancy in their take-home pay or on their quarterly statement. Or errors may be uncovered by the payroll auditor, who may identify an error for the select employers they choose to audit each year. As a result, errors may be discovered long after the deferrals have occurred, resulting in a high number of corrections.

The result: Existing multiemployer DC plans will likely not add a 401(k) feature to their plans and very few (if any) new 401(k) plans will be established in the multiemployer space. This will not help to enhance retirement savings for members, as the law intended.

To illustrate the points above, Figure 2 is an example of how this could impact one union member as they move from employer to employer. This example does not layer in the complexity of automatic increases to the deferral rate.

Technical corrections do not go far enough

A discussion draft containing technical corrections (TC) to certain provisions of SECURE 2.0 was jointly released by the U.S. House and U.S. Senate on December 6, 2023. The TC amends Section 101 related to plans or arrangements established before December 29, 2022, the enactment date. It clarifies that a “plan maintained by more than one employer” is a multiple employer plan as defined in IRC Section 413(c), not a multiemployer collectively bargained plan as defined in IRC Section 414(f). The likely effect of the TC as it is currently drafted is as follows:

• A multiemployer 401(k) plan established before December 29, 2022, would be exempt from the mandatory automatic enrollment and automatic increase requirements.
• A multiemployer DC plan established before December 29, 2022, that adds a 401(k) component after December 29, 2022, would be subject to the mandatory automatic enrollment and automatic increase requirements.
• Likewise, a new multiemployer 401(k) plan established after December 29, 2022, would be subject to the mandatory automatic enrollment requirements.

In order to exempt all multiemployer 401(k) plans, the language in the current TC draft needs to be modified further.

How multiemployer plans differ from multiple employer plans

As noted previously, a multiemployer plan is a plan maintained in accordance with one or more collective bargaining agreements between one or more unions and multiple employers operating in the same or related industry. Members can earn benefits under a plan while working for several participating employers during their career.

Multiple employer plans are comprised of unrelated employers that band together under one plan to provide economies of scale (such as potentially better investment options and reduced investment and administrative fees) that could not be achieved if they sponsored single-employer plans. It is unlikely that members in a multiple employer plan will move from employer to employer within the plan. Therefore, automatic enrollment and automatic escalation provisions could be implemented by these plans because it is likely that a member will have only one payroll provider throughout their career.

While SECURE 2.0 aims to enhance retirement savings for individuals, its provisions for automatic enrollment and automatic escalation present significant administrative challenges for multiemployer plans. The complexity of administering 401(k) deferrals for these plans increases exponentially, likely leading to errors and increased administrative costs. These provisions may also discourage the establishment of new 401(k) plans in the multiemployer space, which would lead to lower levels of retirement savings, contrary to the law’s intended purpose. The proposed technical corrections do not fully address these issues, and further modifications are needed to exempt all multiemployer 401(k) plans.

Please contact your Milliman consultant with any questions.