Short title

This Act may be cited as the

401(k) Automatic Enrollment Act of 2005

Automatic enrollment arrangements

(a)

In general

Section 401(k) of such Code is amended by adding at the end the following new paragraph:

(13)

Automatic enrollment arrangements

(A)

In general

If the requirements of subparagraphs (B) through (F) are met, a cash or deferred arrangement shall not fail to be treated as satisfying the requirements of paragraph (2)(A) merely because elective deferrals (as defined in section 402(g)(3)) are contributed on behalf of eligible employees to a trust under the plan of which such arrangement is a part without an affirmative election by the employee to make such contributions. (B)

Election out

The requirements of this subparagraph are met if the employee may elect to receive any future amount of the contributions described in subparagraph (A) directly in cash in lieu of such contributions. (C)

Amount of contributions

The requirements of this subparagraph are met if the contributions described in subparagraph (A) are made in an amount equal to— (i)in the case of an employee with respect to whom an election is in effect under subparagraph (B), zero, (ii)in the case of an employee who makes an affirmative election regarding the specific amount of such contributions (expressed either as a percentage or as a dollar amount of compensation), such amount, and (iii)in the case of any other employee, such percentage or dollar amount of compensation as is specified under the plan for purposes of this paragraph,

provided that is subparagraphs (A) and (B) apply to fewer than all eligible employees, the automatic enrollment arrangement shall be treated as applying to such employees and to the employees who are described in clauses (i) and (ii).

(D)

Investment of contributions

The requirements of this subparagraph are met if the contributions described in subparagraph (A) are not invested in qualifying employer securities (as defined in section 4975(e)(8)) or qualifying employer real property (as defined in section 407(d)(4) of the Employee Retirement Income Security Act of 1974) unless such investment is affirmatively elected by the employee. (E)

Time of contributions

The requirements of this subparagraph are met if the contributions described in subparagraph (A) with respect to any employee begin not later than the date described in section 410(a)(4) with respect to such employee. (F)

Notice

The requirements of this subparagraph are met if the employer provides notice, as follows: (i)

In general

The administrator of a plan which includes an automatic enrollment arrangement (determined without regard to this subparagraph) shall, within a reasonable period before the first day of each plan year, give to each employee to whom an automatic enrollment arrangement applies for such plan year notice of the employee's rights and obligations under the arrangement which— (I)is sufficiently accurate and comprehensive to apprise the employee of such rights and obligations, and (II) is written in a manner calculated to be understood by the average employee to whom the arrangement applies. (ii)

Requirements

A notice shall not be treated as meeting the requirements of clause (i) with respect to an employee unless— (I)the notice includes an explanation of the employee’s right under the arrangement to elect not to have elective contributions made on the employee’s behalf (or to elect to have such contributions made at a different percentage or rate than that specified as the automatic enrollment contribution percentage), including how and when such elections may be made, (II)the employee has a reasonable period of time, after receipt of the notice and before the first elective contribution is made on the employee’s behalf pursuant to automatic enrollment, to make such election, (III)the notice describes any employer matching contributions or other employer contributions available under the arrangement, and (IV)the notice explains how contributions made under the arrangement will be invested in the absence of any investment election by the employee. (G)

Unwind distributions

(i)

In general

An automatic enrollment arrangement shall not fail to be treated as a qualified cash or deferred arrangement merely because the plan allows an employee to opt out retroactively to the beginning of the plan year and make an unwind distribution during such plan year if such employee is not eligible to make elective contributions to the plan during the remainder of the plan year after the date of such distribution. This clause shall not apply more than once with respect to any employee of an employer. (ii)

Tax treatment of distribution

An unwind distribution shall be includible in the gross income of the employee. No tax shall be imposed under section 72(t) on any such distribution. (iii)

Unwind distribution defined

For purposes of this subparagraph, the term unwind distribution means a distribution to a participant who is not a highly compensated employee (as defined in section 414(q)) of contributions described in subparagraph (A) (and earnings attributable thereto) from an automatic enrollment arrangement in which the account balance of the participant immediately before such distribution does not exceed the greater of— (I)$400, or (II)the amount of such contributions made in connection with not more than the first 4 payroll periods following the application of subparagraph (A) to the participant. (iv)

Employer matching contributions

In the case of any unwind distribution, employer matching contributions shall be forfeited or subject to such other treatment as the Secretary may prescribe through regulations or other guidance. (v)

Unwound contributions not taken into account

Contributions attributable to an unwind distribution shall not be taken into account for purposes of paragraph (3). (H)

Automatic or affirmatively elected increase in contribution amounts

An automatic enrollment arrangement shall not fail to be treated as a qualified cash or deferred arrangement merely because the plan— (i)permits eligible employees to elect to have the percentage or dollar amount described in subparagraph (C)(iii) automatically increased from time to time in the future by a specified percentage or dollar amount of compensation based on such factors as increases in compensation, passage of time, or increases in years of service or participation, or (ii)provides for one or more of the increases described in clause (i) to occur automatically unless the eligible employee elects otherwise,

provided that, in the case of either clause (i) or (ii), the employee may elect to stop such increases with respect to any future contributions.

(I)

Regulations and reporting

The Secretary is authorized to prescribe regulations or other administrative guidance to carry out this paragraph, including— (i)simplified methods of reporting and otherwise implementing the unwind of tax consequences and plan qualification consequences in order to simplify those consequences for participants and plan sponsors, and (ii)simplified methods for plan administrators to implement automatic enrollment arrangements and any provisions necessary to prevent abuse in connection with such arrangements.. (J)

Automatic enrollment arrangement

For purposes of this paragraph, the term automatic enrollment arrangement means an arrangement to which subparagraph (A) applies.

(b)

Safe harbor automatic enrollment arrangements under simple retirement accounts

(1)Clause (i) of section 408(p)(2)(A) of such Code is amended by adding at the end the following new flush language:

but only if such arrangement is an automatic enrollment arrangement (as defined in section 401(k)(13)) that meets the requirements of subclauses (I), (IV), and (V) of section 401(k)(12)(G)(i) (applied in the case of such subclause (V) by substituting 3 percent for minimum contribution percentage therein),

(2)Subsection (p) of section 408 of such Code (relating to simple retirement accounts) is amended by adding at the end the following new paragraph:

(10)

Safe harbor automatic enrollment arrangements

Under regulations prescribed by the Secretary, rules similar to the rules of section 401(k)(13) shall apply for purposes of this subsection, provided that the Secretary may adapt such rules as he determines to be necessary or advisable to take into account the differences between the provisions of section 401(k) and this subsection.

(c)

Automatic enrollment arrangements under 403(b) plans

Subsection (b) of section 403 of such Code (relating to taxability of beneficiary under annuity purchased by section 501(c)(3) organization or public school) is amended by adding at the end the following new paragraph:

(14)

Automatic enrollment arrangements

(d)

Automatic enrollment arrangements under section 457 plans

Subsection (e) of section 457 of such Code is amended by adding at the end the following new paragraph:

(19)

Automatic enrollment arrangements

Under regulations prescribed by the Secretary, rules similar to the rules of section 401(k)(13) shall apply for purposes of this section, provided that the Secretary may adapt such rules as he determines to be necessary or advisable to take into account the differences between the provisions of section 401(k) and this section.

(e)

401(k) plan matching safe harbor with automatic enrollment

(1)

In general

Clause (i) of section 401(k)(12)(B) of such Code is amended to read as follows:

(i)

In general

The requirements of this subparagraph are met if— (I)the arrangement is an automatic enrollment arrangement (as defined in paragraph (13)) which meets the requirements of subparagraph (G), and (II)under the arrangement, the employer makes matching contributions on behalf of each employee who is not a highly compensated employee in an amount equal to 50 percent of the elective contributions of the employee to the extent that such elective contributions do not exceed 6 percent of the employee’s compensation.

(2)

In general

Paragraph (12) of section 401(k) of such Code (relating to alternative methods of meeting nondiscrimination requirements) is amended by adding at the end the following new subparagraph:

(G)

Automatic enrollment

(i)

In general

An automatic enrollment arrangement meets the requirements of this subparagraph if— (I)elective contributions are made under the arrangement with respect to each eligible employee (other than employees with respect to whom an election is in effect under paragraph (13)(B)) for such year, (II)any election under subparagraph (B) or (C)(ii) of paragraph (13) remains in effect with respect to any employee for a period of 3 years unless the plan provides for a shorter period or unless the employee makes a new election thereunder or has elected an automatic increase in the employee’s contribution percentage, (III)85 percent or more of eligible employees participated in the arrangement at any time during the previous plan year (unless the employer has reason to know that such time is not representative of participation during such year), and (IV)the plan specifies a percentage for purposes of paragraph (13)(C)(iii) which is equal to the minimum contribution percentage, which shall not apply to any employee described in clause (i) or (ii) of paragraph (13)(C), and which may be further increased in accordance with paragraph (13)(H)(i). (ii)

Minimum contribution percentage

For purposes of this subparagraph, the term minimum contribution percentage means, with respect to the first plan year for which an employee was eligible to participate, a percentage of not less than 3 percent, and with respect to any subsequent plan year, a percentage equal to such percentage for the first plan year increased by either 1 percent or 2 percent for each subsequent plan year (as the plan may provide), except as provided in clauses (iii) and (iv). (iii)

9 percent limitation

The minimum contribution percentage shall not exceed 9 percent for any plan year. (iv)

Limitation based on increase in employee compensation

With respect to any plan year beginning after the first plan year for which such employee was eligible to participate in the plan, the minimum contribution percentage with respect to such employee shall not exceed the sum of the minimum contribution percentage with respect to such employee for the prior plan year, plus the percentage increase in the employee’s compensation with respect to the current plan year (as determined under the plan and consistent with such requirements as the Secretary may provide). (v)

Regulations

The Secretary may provide for alternative or simplified methods of compliance with any provision of this subparagraph as the Secretary determines to be necessary or advisable to simplify plan administration or prevent abuse, including simplified methods of administering automatic enrollment and automatic contribution percentage increases for employees who are not newly eligible employees.

(f)

Effective dates

(1)

In general

Except as provided in paragraphs (2) and (3), the amendments made by this section shall apply to plan years beginning after December 31, 2005. (2)

Qualifying employer securities and real property

In the case of a plan that, as of January 1, 2005, uses an automatic enrollment arrangement that does not comply with subparagraph (D) of section 401(k)(13) of the Internal Revenue Code of 1986, as amended by this section, such subparagraph shall apply to plan years beginning after December 31, 2006. (3)

Alternative methods of meeting nondiscrimination requirements

In the case of a plan to which section 401(k)(12)(B) or section 408(p)(2) (other than subparagraph (B) thereof) of the Internal Revenue Code of 1986 applies on January 1, 2005, the amendments made by this section shall apply to plan years beginning after December 31, 2007.

Preemption of State laws precluding automatic enrollment or automatic rollovers

(a)

In general

Section 514 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1144(b)) is amended— (1)by redesignating subsection (d) as subsection (e); and (2)by inserting after subsection (c) the following new subsection:

(d)The provisions of this title shall supersede any and all State laws insofar as they may preclude, or have the effect of precluding— (1)the establishment or operation of, or making of contributions to, a pension plan under an automatic enrollment arrangement (as defined in section 401(k)(13) of the Internal Revenue Code of 1986), or (2)a distribution described in section 401(a)(31)(B) of such Code or the establishment or operation of an individual retirement plan (as defined in section 7701(a)(37) of the Internal Revenue Code of 1986) allowing receipt of such distributions.

(b)

Effective date

The amendments made by this section shall apply with respect to actions (described in paragraph (1) or (2) of section 514(d) of the Employee Retirement Income Security Act of 1974 (added by this section)) taken before, on, or after the date of the enactment of this Act.

Limitation of fiduciary responsibilities with respect to automatic rollover

(a)

In general

Section 404(c)(3) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1104(c)(3)) is amended to read as follows:

(3)In the case of a pension plan which makes a transfer to an individual retirement account or annuity (described in section 408 of the Internal Revenue Code of 1986) of a designated trustee or issuer under section 401(a)(31)(B) of such Code— (A)the duties described in subsections (a) and (b) shall not apply to the assets in the account or annuity except for the initial investment of such assets in the account or annuity, and (B)a fiduciary of the plan shall have no responsibility for any losses attributable to such initial investment (or any other investment in the account or annuity) which occur after— (i)the earliest of— (I)an affirmative election by the owner of the account or annuity among investment options, (II)a rollover of all or a portion of the amount to another individual retirement account or annuity or to an employer plan or simple retirement account; or (III)1 year after the transfer is made, or (ii)a transfer which is made in a manner consistent with guidance provided by the Secretary.

(b)

Effective date

The amendment made by this section shall apply with respect to transactions occurring on or after January 1, 2006.

Automatic or default investments

(a)

In general

Section 404 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1104) is amended by adding at the end the following new subsection:

(e) (1)A fiduciary with respect to an individual account plan shall be deemed to have satisfied the requirements of subsection (a)(1)(B) with respect to the plan, in connection with any qualifying automatic investment under the plan, to the extent those requirements pertain to asset allocation as between equity instruments or investments and debt instruments or investments and to such further extent as may be specified by the Secretary in administrative guidance of general applicability. (2)For purposes of this subsection, the term qualifying automatic investment means, in connection with a participant in a plan, an investment of assets constituting some or all of the participant’s accrued benefit under the plan in a form of investment specified by the plan, in any case in which— (A)such assets— (i)are attributable to employer contributions (and earnings thereon) made pursuant to an automatic enrollment arrangement (as defined in section 401(k)(13) of the Internal Revenue Code of 1986), (ii)are attributable to distributions described in section 401(a)(31)(B) of such Code, or (iii)have been identified by the Secretary as appropriate for automatic investment, (B)the plan provides for investment of such assets in such form of investment unless, in lieu thereof, alternative forms of investments, which are also made available to the participant under the terms of the plan, are selected by the participant, (C)the plan provides, under such form of investment, for investment of such assets under constraints designed to— (i)limit the risk associated with the investment portfolio to a reasonable level of risk while seeking to maximize return consistent with that level of risk, or (ii)minimize risk while seeking a reasonable expected return, and (D)the expenses associated with the investment meet the standards of paragraph (3). (3) (A)The expenses associated with an investment meet the standards of this paragraph if they do not exceed reasonable expenses. Such expenses shall not be treated as exceeding reasonable expenses solely because the expenses in any year (excluding expenses for acquisition of the investment) exceed the investment returns for that year and cause a reduction in principal. (B)For purposes of subparagraph (A), the term expense means any fee, charge, commission, load, or other cost or expense associated with the investment (including cost of acquisition, establishment, maintenance, surrender, or termination of the investment and any other cost of managing or administering the investment) to the extent borne by participants. (C)The expenses associated with an individual retirement plan (as defined in section 7701(a)(37) of the Internal Revenue Code of 1986) shall not be treated as meeting the standards of this paragraph if such expenses exceed the expenses normally charged by the trustee or custodian of a comparable individual retirement plan established to receive rollover contributions (as defined in section 408(d)(3) of such Code) which are not distributions described in section 401(a)(31)(B) of such Code. (4)The requirements of paragraph (2)(C) shall be treated as satisfied with respect to investments provided for by a plan to the extent such investments consist of— (A)a balanced portfolio comprised of both equity investments and either stable value or fixed income investments provided by a financial institution (or similar financial entity) that is regulated by the United States or a State in any case in which— (i)the equity investments are broad-based index funds or, to the extent permitted by the Secretary under regulations, guidelines, or other administrative guidance, actively managed funds that are broadly diversified so as to minimize the risk of large losses, and (ii)the stable value or fixed income investments— (I)are designed to comprise at least 20 percent of the total (measured in terms of fair market value), and (II)are either diversified to minimize the risk of large losses or are obligations (which may include inflation-protected obligations) issued by the United States, or (B)stable value investments.

For purposes of this paragraph, the term stable value investments means investments provided by a financial institution regulated by the United States or a State that are designed to preserve principal and provide a reasonable rate of return, whether or not guaranteed, which may include investments designed to maintain a stable dollar value equal to the original value of the investment. The Secretary may prescribe regulations or other administrative guidance prescribing the manner in which the requirements of paragraph (A)(i) may be applied taking into account classes of investment determined on the basis of investment in large, intermediate, or small capitalization funds, funds of varying styles (such as growth funds or value funds), or funds consisting of, or not consisting of, foreign or international securities.

(5)An investment otherwise described in the preceding provisions of this subsection shall not be treated as failing to be a qualifying automatic investment solely by reason of: (A)the availability to the participant under the terms of the plan of alternative forms of investment which meet the requirements of subsection (c)(1) or are managed by an independent investment manager; (B)the extent to which provisions of the plan are or are not directed toward limiting the risk of loss of principal under such investment or promoting long-term capital appreciation; (C)any change or variation in the percentages of equity and stable value investments included in the investment portfolio or other aspects of the constituent investments to the extent such change or variation is based on: (i)automatic rebalancing or variable investment returns prior to periodic rebalancing, (ii)the participant’s age, or (iii)other factors relating to the participant’s situation, such as years until retirement, other retirement plan coverage, financial situation, or investment preferences expressed to the plan by the participant; or (D)the extent to which such investment consists of interests in real estate or real-estate-based investments, if such interests are broadly diversified and do not comprise more than 10 percent of the equity portion of the total investment of plan assets. (6) (A)Notwithstanding paragraph (1), the requirements of subsection (a)(1)(C) shall not be treated as satisfied in connection with any qualifying automatic investment unless such investment (other than the stable value portion thereof) is designed so that no more than 0.5 percent of the total fair market value of the assets invested are invested in securities issued by, or interests in the property of, any single person. (B)For purposes of subparagraph (A), any person and all affiliates thereof shall be treated as a single person. A corporation is an affiliate of a person if such corporation is a member of any controlled group of corporations (as defined in section 1563(a) of the Internal Revenue Code of 1986, except that applicable percentage shall be substituted for 80 percent wherever the latter percentage appears in such section) of which person is a member. For purposes of the preceding sentence, the term applicable percentage means 50 percent, or such lower percentage as the Secretary may prescribe by regulation. A person other than a corporation shall be treated as an affiliate of any other person to the extent provided in regulations of the Secretary. Regulations under this subparagraph shall be prescribed only after consultation and coordination with the Secretary of the Treasury. (7)The Secretary shall issue regulations or other administrative guidance specifying the manner in which investments under independent professional investment management pursuant to sections 402(c)(3) and 403(a)(2) and other qualifying automatic investments may serve as the default investment arrangement with respect to some or all plan assets without adversely affecting plan compliance with this part, as governed by subsection (c)(1) with respect to assets over which participants or beneficiaries exercise control. (8) (A)The Secretary may issue regulations or other administrative guidance for compliance with the requirements of this subsection which are consistent with the provisions of this subsection. Compliance with such regulations or guidance shall be deemed to be compliance with the requirements of this subsection. Such regulations or guidance may express compliance in terms of percentages of assets under management, flat dollar amounts, or other factors. (B)The regulations issued pursuant to subparagraph (A) may include procedures for granting conditional or unconditional exemptions of investments, classes of investments, investment managers, or classes of investment managers from all or part of the requirements of this subsection. Such procedures shall be similar to the procedures applicable under section 408(a) and subject to the same standards and limitations as apply under section 408(a). Such exemptions may include, in the case of qualifying automatic investments, relief from, or simplified methods of compliance with, the requirements of subparagraphs (B) and (C) of subsection (a)(1) and the provisions of subsection (c).

(b)

Effective date

The amendment made by this section shall apply with respect to investments made on or after January 1, 2005 (irrespective of the extent to which the Secretary of Labor has issued regulations, guidelines, or other administrative guidance pursuant to section 404(e) of the Employee Retirement Income Security Act of 1974 (added by this section)).

Modification of notice requirements applicable to alternative methods of meeting nondiscrimination requirements for matching contributions

(a)

Semi-annual notice requirement

Subparagraph (D) of section 401(k)(12) of the Internal Revenue Code of 1986 (relating to notice requirement) is amended by striking year, and inserting year and during the 6th or 7th month of such year,. (b)

Notice not required for nonelective contributions

Clause (ii) of section 401(k)(12)(A) of such Code (relating to general rule for alternative methods of meeting nondiscrimination requirements) is amended by inserting in the case of matching contributions described in subparagraph (B), before meets. (c)

Technical correction

Section 401(k)(12)(D) of such Code is amended by striking appraise and inserting apprise. (d)

Effective date

(1)

Notice

The amendments made by subsection (a) shall apply to plan years beginning after December 31, 2006. (2)

Nonelective contributions

The amendments made by subsection (b) shall apply to plan years beginning after December 31, 2005.

Report on low-cost individual retirement plans

After public comment and appropriate consultation with private sector representatives, the Secretary of the Treasury and the Secretary of Labor shall, not later than December 31, 2005, jointly submit to Congress a report containing their findings and recommendations regarding the availability of, and means of promoting and encouraging the provision of, low-cost individual retirement plans (as defined in section 7701(a)(37) of the Internal Revenue Code of 1986), or similar retirement savings and investment vehicles, which are suitable for the preservation and maintenance of smaller retirement benefits or accounts on a widespread and portable basis and for large numbers of moderate- and lower-income individuals.