Editor’s Note: The Congressional Research Service (CRS) in a recently released primer looks at contributions to defined contribution (DC) plans in a variety of respects, with a special focus on contributions to private-sector DC plans. This is the third in a four-part series on the report; the first is here; the second is here.
There are a variety of automatic features employers and plan sponsors can incorporate into a DC plan, and those features involve and affect contributions into accounts in those plans. These are among the matters the CRS discusses in “Contributions to Defined Contribution Retirement Plans.”
There also can be a number of motivations behind implementing automatic features. Among the reasons the Department of Labor’s Employee Benefits Security Administration cites are increasing employees’ retirement savings, reducing management fees, achieving better economies of scale that lower transaction costs, and better ensuring that they will pass nondiscrimination testing. Not to mention the requirements of the SECURE 2.0 Act.
Automatic Enrollment
Automatic enrollment is increasingly common, notes the CRS, and its adoption accelerated in the wake of the Pension Protection Act of 2006 enactment. The Bureau of Labor Statistics (BLS) in the Employee Benefits Survey—Retirement Plan Provisions for Private Industry Workers in the United States released in April 2023 backs that observation, reporting that automatic enrollment went from covering 21% of employees in 2010 to twice that rate—42%—by 2022.
And that is only going to increase—the CRS observes that under Section 101 of SECURE 2.0,most 401(k) plans established in 2025 or thereafter must have an automatic enrollment feature.
Automatic Contributions
There are three kinds of automatic contribution arrangements. They are:
1. The automatic contribution arrangement (ACA), through which employees are automatically enrolled at a uniform default contribution rate.
2. The eligible automatic contribution arrangement (EACA), through which employees are automatically enrolled at a uniform default contribution rate. Employees must be notified that the plan has an automatic enrollment arrangement 30-90 days before the first automatic contribution and also before each subsequent plan year, and employers may allow them to withdraw contributions 30-90 days after the first default contribution.
3. The qualified automatic contribution arrangement (QACA), plan features that satisfy annual nondiscrimination and safe harbor requirements.
Contribution rates. The CRS observes that there often is little deviation from the rate in place when participants join. “Participants tend to keep their contribution rates near or at the default rates,” the CRS notes in the report. They suggest that a reason for this could be the “anchor effect”—a perception that the deferral rate was set by the employer.
And, the CRS reminds, under Section 101 of SECURE 2.0, 401(k) plans established in 2025 or later must have a default contribution level of at least 3%.
Elective deferrals. Even if an employee is automatically enrolled, the contributions he or she makes into their retirement account are considered to be elective deferrals, says the CRS. This is because (1) employees can choose a deferral rate different from the automatic one, and (2) they can opt out of participating in the plan.
In making this argument, the CRS cites IRS guidance contained in Revenue Ruling 2000-8, in which the IRS says that in some cases, employees who opt out of a plan into which they had been automatically enrolled can be refunded for contributions made through automatic enrollment. They could not be refunded if they were not considered to have made the contributions themselves.
Automatic Escalation
Under automatic enrollment arrangements, plans schedule regular contribution increases up to certain limits, subject to a statutory maximum. The CRS notes that the Bureau of Labor Statistics (BLS) estimated that in 2022, 26% of private-sector workers in savings and thrift plans participated in plans with this feature.
Not only that, under Section 101 of SECURE 2.0, 401(k) plans established in 2025 or later must include an automatic escalation provision of 1% per year to a level of at least 10% and no more than 15%.
Plan sponsors are responding, according to the report; the CRS cites the Plan Sponsor Council of America’s (PSCA) 65th Annual Survey, in which they reported that half of the 557 plans in the 2021 study set an automatic escalation cap of 10%.
Drilling down, the CRS notes that the PSCA reports that of the plans with automatic enrollment, 43% automatically escalated all participants’ contributions, 11% automatically escalated the contributions of participants contributing under the full employer match threshold, and 24% allowed participants to opt into automatic escalation.
Next: Policy Issues Affecting DC Plan Contributions
