(b)lines Ask the Experts – Why 403(b)s Are Slower to Adopt Auto Enroll

Michael A. Webb, Vice President, Retirement Plan Services, Cammack LaRhette Consulting, answers:    

Some commentators have suggested that this is simply the continuation of an historic trend where 403(b) plans generally lag behind 401(k) in the adoption of new features. However, the experts believe that there is more to this disparity than a simple trend; specifically, there are features of automatic enrollment that are more attractive to 401(k) sponsors than 403(b) sponsors, as follows:  

1)     The adoption of a specific type of automatic enrollment arrangement known as a Qualified Automatic Enrollment Arrangement, or QACA, eliminates a particularly onerous type of nondiscrimination testing for 401(k) plans that tests elective deferrals, known as an Average Deferral Percentage, or ADP, test. This test simply does not exist for 403(b) plans, removing an incentive for such plans to adopt this specific type of automatic enrollment provision.  

2)     Another type of test that adoption of a QACA eliminates is a test of employer matching contributions known as an Average Contribution Percentage, or ACP, test. Although this test is required in 403(b) plans, matching contributions are far more common in 401(k) plans, so for many 403(b) plans the test is not necessary. This fact eliminates yet another incentive for 403(b) plans to adopt this particular form of automatic enrollment.  

3)     Some 403(b) plans of private tax-exempts are elective deferral-only arrangements that are exempt from ERISA if certain rules are followed. Unfortunately, the adoption of an automatic enrollment feature would violate such rules, and cause the plan to become subject to ERISA, which presumably would be an undesirable outcome for these particular plan sponsors and thus discourage them from adopting an automatic enrollment provision.   

Given these facts, we believe that it is easy to see why automatic enrollment has take off so rapidly in 401(k) plans relative to 403(b) plans.   

Does all of this mean that adoption of an automatic enrollment provision is undesirable for 403(b) plans? The answer to that question is no, as automatic enrollment can be a valuable tool in ensuring that employees, 401(k) and 403(b) participants alike, accumulate sufficient account assets for retirement. For plans where participation is low and other solutions to the issue, such as simple enrollment, have not worked, automatic enrollment would be an alternative that warrants consideration if a significant increase in participation rate is desired. Of course, if the plan provides for matching contributions, adoption of an automatic enrollment provision would increase the plan expenditure on such contributions as well.  

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.