Adopting automatic enrollment in the public sector: a case study.

• Author: Clark, Robert L.
• Position: Case study

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Between 1998 and 2000, Internal Revenue Service (IRS) rules began to allow for new and current private-sector employees to be automatically enrolled in a defined contribution retirement savings account offered by their employer--primarily 401(k) plans. These rules, combined with passage of the Pension Protection Act of 2006, have led to an increase in plans automatically enrolling participants, from 1 percent of all plans in 2004 to 16 percent in 2009, with this 16 percent of plans accounting for almost half of all plan participants nationwide) The private sector continues to view automatic enrollment as an important way to encourage employees to save for retirement, a feature that is also receiving increased attention in the public sector.

As of 2010, 20.9 percent of respondents in a survey of state and local governments reported that their governmental unit has instituted some form of automatic enrollment feature in its defined contribution retirement plan. (2) In 2010, a few states adopted an automatic enrollment feature in one of the defined contribution plans they offer. One of these is South Dakota. The Supplemental Retirement Plan (SRP) is a 457, tax-deferred savings option offered to members of South Dakota Retirement System (SDRS). The SRP allows SDRS participants to save for retirement while postponing the payment of income tax on both contributions and earnings until these funds are withdrawn. All members of SDRS have the option of participating in the SRP, which is managed by SDRS through a contract with a third party. Prior to July 2009, newly hired public employees were given the option of completing enrollment forms that required them to specify a monthly contribution and an investment choice. If the worker did nothing, he or she was not enrolled in the plan, and no money was withheld. Subsequently, workers could decide to begin making contributions at any time during their tenure.

In 2008, the South Dakota Legislature enacted legislation that shifted the terms of employment in regards to participating in the SRP. Now, instead of being out of the program unless they actively chose to participate, newly hired workers will be automatically enrolled in the SRP with a minimum contribution and a default investment option. Workers could choose to opt out of the system and stop contributions within 90 days of their first pay date and receive a full refund of their contributions plus associated gains or losses.

RETIREMENT BENEFITS FOR PUBLIC EMPLOYEES

Assessing the importance of automatic enrollment in the SRP requires knowledge of the total package of retirement benefits offered to public employees. (3) The need for additional retirement saving through supplemental retirement plans depends on the generosity of other retirement benefits. All public employees in South Dakota are eligible for coverage by at least four retirement plans. The mandatory plans are Social Security, Medicare, and SDRS, and the fourth is the optional SRP plan, which allows individuals to contribute pre-tax dollars. Additionally, retirees of the state and the Board of Regents are also eligible for coverage under the state health plan. SDRS, which is a defined benefit plan, is financed by employer and employee contributions and provides a benefit equal to about 50 percent of final salary for a retiree with 30 years of service. Retired state and Board of Regents employees are allowed to remain in the state health plan up to age 65 by paying the specific premium.

South Dakota Retirement System. The SDRS benefit structure has been increased 10 times over the past three decades, reaching 1.7 percent in 2008. As a result, the normal cost of the SDRS rose from 7.1 percent of payroll in 1978 to 12 percent in 2006. In 2008, both the employee and employer contributed 6 percent of salary to the system.

Participation in SDRS has grown substantially, from 23,500 public employees in 1974, of whom 2,900 were beneficiaries, to 71,434 in 2008, of whom 19,321 are retirees and beneficiaries. The system has been reasonably well funded throughout its history. The auditors' report of the financial status of the retirement fund for the year ended June 30, 2008, indicated that the plan had liabilities of $6.98 billion and assets of $6.78 billion, or an unfunded liability of $192 million. The plan was 97.2 percent funded, and the unfunded liability represented 14.1 percent of covered payroll.

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