How Common are Automatic Enrollment and Target Date Funds in 401(k) Plans?

Woman sitting with couple discussing target date fund options

As employers and plan sponsors look for ways to improve employee participation and engagement in their 401(k) plans, a common question we hear is, “What are other plans doing about automatic enrollment and target-date funds?”. As you may expect, the amount of plans that are adopting both features is trending upwards.

What is Automatic Enrollment or auto-enrollment?

There are three (3) different versions of automatic enrollment:

  • Automatic Contribution Arrangement (“ACA”)
    • Employees automatically enroll in the plan unless they elect otherwise.
    • The plan document specifies the percentage of wages that will be automatically deducted.
    • Employees have the option to waive participation or to contribute a different percentage of their pay.
  • Eligible Automatic Contribution Arrangement (“EACA”)
    • The plan’s default deferral percentage is applied uniformly to all employees after providing them the required notice.
    • The plan allows employees to withdraw automatic contributions, including earnings, within 90 days of their 1st automatic contribution.
  • Qualified Automatic Contribution Arrangement (“QACA”)
    • The plan’s default deferral percentage is applied uniformly to all employees after providing them the required notice.
    • Provides a required “safe harbor” contribution (either match or non-elective) which exempts the plan from the annual actual deferral percentage (“ADP”) and actual contribution percentage (“ACP”) non-discrimination testing requirements.
    • The default deferral percentage starts at 3.0% of pay or more (not to exceed 10%) and gradually increases to at least 6.0% of pay with each year that an employee participates.
    • Employees must be 100% vested in the required employer matching or non-elective contribution after no more than two (2) years of service.
    • Required employer contributions under the QACA are not eligible for hardship distributions.

To recap, a plan with automatic enrollment will enroll a newly eligible employee into the plan unless they make an election to “opt-out”.

Is Automatic Enrollment or auto-enrollment common?

Based on Vanguard survey data, the percentage of plans utilizing auto-enrollment has increased over the last 5 years from 41% in 2005 to 50% of plans in 2020.

What is Automatic Escalation or auto-escalation?

A plan using automatic escalation increases an employee’s contribution amount each year automatically. The employee also has the option to opt-out of this each year.

Is Automatic Escalation or auto-escalation common?

Automatic escalation plans also continue to increase, with it being a feature in 53% of plans. Of those who have adopted auto-escalation, 48% of them do so as an “opt-out” feature. This means that the contribution will increase unless the employees elect otherwise.

What are Target Date Funds?

A target-date fund (“TDF”) can be either a mutual fund or an exchange-traded fund (“ETF”) which is designed to invest assets for a specific time frame. For example, a Target Date 2030 Fund is designed to invest under the assumption that the participant or account holder will need to begin accessing the funds in 2030. Additionally, 98% of plan sponsors use a Target Date Fund or series of Target Date Funds as the default fund.

Are Target Date Funds common?

According to a recent Vanguard study, in 2020, target-date funds were in 94% of 401(k) Plans with 37% of total plan assets invested in TDFs and 59% of new contributions invested in TDFs. For smaller plans (with under 250 participants), 85% offer TDFs with 25% of total plan assets in TDFs and 40% of all new contributions invested in TDFs. If you’d like to compare previous statistics, check out our previous summary of the 2017 Vanguard study.

Odyssey Advisors seeks to stay up-to-date with current & future plan design options as well as the relevant IRS, DOL, and ERISA regulations to keep our clients and partners informed. If you have questions, please reach out to an Odyssey Consultant for more information.

Posted in ,

Featured Posts

Leave a Comment

You must be logged in to post a comment.