The IRS submitted a Compliance Questionnaire to 1200 401(k) plans that had filed Form 5500. If you are interested, you can read their report for yourself. To me, one of their key findings was around plans that use ACAs. Of participants eligible for ACAs, here is the actual data:
- 43% defer at the default rate
- 29% elect a rate higher than the default rate
- 7% elect a rate lower than the default rate
- 21% opt out of participation entirely
In my experience, the most common auto-enrollment rate is 3% of pay. If that is truly representative of US companies at large, then 71% of participants are deferring 3% of their annual compensation or less.
That's not good. Even for participants who defer for quite a long time, annual deferrals of 3% of pay, even with employer matching contributions added to them will not get anyone to a comfortable retirement.
One of the types of ACAs available to plan sponsors is a qualified automatic contribution arrangement (QACA). QACAs generally provide for auto-escalation in default deferrals. Oversimplifying somewhat, a QACA must have a default deferral percentage of at least 6% of pay in the third year following the initial period and cannot increase to a rate above 10% of pay. QACAs are exempt from ADP and ACP testing.
Participants in QACAs who do not opt out of the defaults will often have enough savings to retire comfortably. That's the good news. The other side of the coin is that IRS data shows that only about 5% of all 401(k) plans have ACAs and of those, fewer than 1/4 are QACAs. That means that roughly 1% of all 401(k) plans are QACAs. Many of the rest will have very few participants who will have prepared themselves through saving with sufficient money to retire.
That's not good. 401(k) auto-enrollment is not working as it should.