Traditionally, employers that sponsored retirement plans generally established “defined benefit” plans. Under such plans, participation is generally automatic for eligible workers, and retirement benefits are established by a formula, often based on a worker’s salary and years of service. Since the 1980s, defined contribution plans—most prominently the 401(k) plan—have supplanted defined benefit plans as the dominant type of private-sector retirement plan. Under defined contribution plans, workers typically must decide whether or not to participate, how much to contribute, and how to invest plan assets from a range of options provided under the plan. Under a 401(k) plan, if the employee does not participate, if contributions made to an employee’s account are insufficient, or if the investments that an employee chooses yield an inadequate return, the employee may have retirement income that is insufficient to maintain his or her desired standard of living. As defined contribution plans emerged as the dominant form of retirement plan, the percentage of the population covered by employer-sponsored plans changed very little—remaining at about half of the workforce. As figure 1 shows, Current Population Survey data reveal that about 48 percent of the total U.S. workforce was not covered by an employer- sponsored a plan in 2007. About 40 percent worked for an employer that did not sponsor a plan, and about 8 percent did not participate in the plan that their employer sponsored. According to the Current Population Survey, certain segments of the working population have consistently had much lower rates of employment with employers sponsoring a plan, and lower participation rates than the working population overall. As figure 2 illustrates, larger portions of certain worker groups, such as lower-income workers, younger workers, workers employed by smaller companies, and part-time workers lack coverage compared to all full-time workers. Workers may choose not to enroll, or delay enrolling, in a retirement plan for a number of reasons. For example, according to a recent Congressional Research Service presentation of data from the Survey of Income and Program Participation, most non-participating workers whose employer sponsored a plan said they thought—in some cases, incorrectly—they were ineligible. The report also found that substantial numbers of employees fail to participate because they believe they cannot afford to contribute to the plan. For example, 19 percent of nonparticipating respondents cited this reason, and 10 percent said they did not want to tie up their money. In recent years, exponents of “behavioral economics” have noted that many non-participants may not have made a specific decision, but rather fail to participate because of a tendency to procrastinate and follow the path that does not require an active decision. Further, some workers may not participate because of more immediate savings objectives—such as saving for education or a home—and, in the case of lower income workers, the prospect that Social Security benefits will replace a relatively high percentage of income in their retirement years. For example, a recent analysis by the Investment Company Institute concluded that lower income workers are less likely to save for retirement in part because Social Security benefits replace a higher proportion of their pre-retirement earnings. In recent years, automatic enrollment has been advocated as a way to encourage greater participation in 401(k) plans among the portion of the workforce who have access to such plans but opt not to participate. Typically, under 401(k)s and some other types of defined contribution plans, workers have been required to decide whether or not to join a plan, to specify their saving contribution rates, and to select investments from the range of investment options offered by the plan. Under automatic enrollment, in contrast, a worker would be enrolled in a plan unless she or he explicitly opted-out of the plan. Plan sponsors that adopt automatic enrollment must specify a default contribution rate—the portion of an employee’s salary that will be deposited in the plan—that applies to employees who do not choose a different contribution rate. Also, plan sponsors must select a default investment—the fund or other vehicle into which deferred savings will be invested—unless the employee specifies an investment or investments from those available under the plan. Employers may also adopt an automatic escalation policy, under which an employee’s contribution rates would be automatically increased at periodic intervals, such as annually. For example, if the default contribution rate is 3 percent of pay, a plan sponsor may choose to increase an employee’s rate of saving by 1 percent per year, up to some maximum, such as 6 percent. While a plan sponsor that adopts an automatic enrollment policy must specify a default contribution rate and a default investment, plan features such as these and automatic escalation may also be adopted in the absence of an automatic enrollment policy. Automatic enrollment has not been a traditional feature of 401(k) plans and, prior to 1998, plan sponsors feared that adopting automatic enrollment could lead to plan disqualification. However, in 1998, the Internal Revenue Service (IRS) addressed this issue by stating that a plan sponsor could automatically enroll newly hired employees and, in 2000, clarified that automatic enrollment is permissible for current employees who have not enrolled. Nonetheless, a number of considerations inhibited widespread adoption of automatic enrollment, including remaining concerns such as liability in the event that the employee’s investments under the plan did not perform satisfactorily, and concerns about state laws that prohibit withholding employee pay without written employee consent. More recently, provisions of the Pension Protection Act of 2006 (PPA) and subsequent regulations further facilitated the adoption of automatic enrollment by providing incentives for doing so and by protecting plans from fiduciary and legal liability if certain conditions are met. In September 2009, the Department of the Treasury announced IRS actions designed to further promote automatic enrollment and the use of automatic escalation policies. Anti-Discrimination Safe Harbor 401(k) (13) Plans that adopt automatic enrollment may be exempt from required annual testing to ensure that the plan does not discriminate in favor of highly compensated employees. To obtain safe harbor protection, plans must adopt automatic enrollment as well as other plan features and policies. For example, the plan must: Notify affected employees about automatic contributions Defer at least 3 percent of pay in the first year Automatically increase contribution by 1 percent each subsequent year, to a minimum of 6 percent and a maximum of 10 percent Invest savings in a type of investment vehicle identified in Department of Labor regulations as a Qualified Default Investment Alternative (QDIA) Match 100 percent of the first 1 percent of employee contributions, and 50 percent of contributions beyond 1 percent, up to 6 percent of wages Protection from Employee Retirement Income Security Act of 1974 (ERISA) Fiduciary Liability In the absence of direction from an employee, plans that automatically invest contributions in a QDIA are treated as if the employee exercised control over management of their savings in the plan. As a result, plans that comply with Department of Labor regulations pertaining to QDIAs will not be liable for any loss that occurs as a result of such investments. An automatically enrolled worker has 90 days to opt out and withdraw any contributions (including the earnings on those contributions.) These amounts will not be subject to the extra tax that normally applies to distributions received before age 59½. 414(w)(2)(B). Protection from State Wage-Garnishment Laws PPA preempts any state law that would directly or indirectly prohibit or restrict the inclusion of an automatic enrollment arrangement in a plan. Final regulations issued by the U.S. Department of Labor specify four categories of QDIAs. They are (1) a product with a mix of investments that takes into account an individual’s age (such as a target- date fund), (2) an investment service that allocates assets according to an individual’s age (such as a managed account), or (3) a product with a mix of investments that takes into account the characteristics of the group of employees as a whole, rather than each individual (such as a balanced fund). A sponsor may also use a capital preservation fund as a QDIA for the first 120 days of an individual’s participation to simplify administration if the worker opts out of the plan. 29 C.F.R. §2550.404c-5(c)(4). Other proposals have been put forth with the intent of broadening the practice of saving for retirement among workers whose employers do not sponsor a retirement plan. One such proposal is the automatic IRA, which would require employers that do not sponsor a retirement plan to facilitate direct deposit or payroll-deduction savings for all employees. To maximize participation, employees would be automatically enrolled, but would be permitted to opt out. Legislative proposals to establish an automatic IRA requirement were introduced in Congress in 2006 and 2007, and the concept of an automatic IRA was also mentioned in the President’s 2010 Budget proposal. In addition, legislative proposals have been introduced in some states’ legislatures that would involve state governments in facilitating payroll-deduction retirement plans or IRAs for employers that do not already offer them. According to the architect of the state plan concept, a state could play an intermediary role to pool assets and share expenses among many plan sponsors, thus lowering costs. Existing studies show that automatic enrollment significantly increases participation rates in 401(k) plans, although beneficial effects of automatic enrollment may depend on accompanying policies designed to ensure adequate savings and appropriate investment. While defined contribution plan sponsors have increasingly adopted automatic enrollment in recent years, this approach may not be suitable for all plan sponsors, and available data show that some plan sponsors have not augmented automatic enrollment policies with other policies designed to ensure adequate savings. According to analyses we reviewed, automatic enrollment policies result in considerably increased 401(k) participation rates for plans adopting them, with some participation rates reaching as high as 95 percent. For example, one study followed comparison groups hired before and after a company adopted automatic enrollment for new employees only and compared the participation rates of the two groups.