US Safe Harbor 401(k) versus UK Defined Contribution Pension Scheme

While there are many types of employer-sponsored retirement plans, read more for insight into US Safe Harbor plans, as compared to UK Occupational Pension Plans.

Our multi-national clients often ask us about the differences between US 401(k) plans and UK Defined Contribution schemes.

Money in jar next to calculator showing retirement savings plan

In the US, Defined Contribution plans are governed by Section 125 of the Internal Revenue Code. While there are many types of employer-sponsored retirement plans, this article will focus only on Safe Harbor plans, as Safe Harbor plans share many similarities with Occupational Pension Plans. Likewise, Master Trust Plans, which are also prevalent in the UK, will not be part of this article. We will provide an overview of the comparisons between the two plans.

Who must contribute to the plans?

Personal pension plans were introduced on July 1, 1988, and were not compulsory in the UK. However, the UK enacted auto-enroll rules because of the downward trend in enrollment and government-sponsored pension schemes being inadequate or too weak to support a person during their retirement. Auto-enrollment, which was rolled out from 2012 to 2017, was designed to encourage pension saving in employer-sponsored pensions.

The US introduced employer-sponsored 401(k) plans (also called defined-contribution pension plans) in 1978. Although the plans were not required, many employers opted to provide retirements benefits to their employees via a Defined Contribution (DC) plan aka 401(k). US employers are not required to contribute, but they do contribute and match contributions to encourage participation in the retirement plans.

Under Safe Harbor rules, employers who make specific minimum contributions of an employee’s qualified earnings are not required to perform annual non-discrimination testing.

US 401(k) Safe Harbor Requirements:

  Safe Harbor Non-Elective (SHNEC) Safe Harbor Basic Match (SHM) Safe Harbor Enhanced Match (SHEM) Qualified Automatic Contribution Arrangement (QACA)
Automatic Enrollment Not required Not required Not required Required. Minimum default rate is 3% and must increase at least 1% annually to a minimum of 6% (max 10%). The auto increase can be avoided if default rate is a minimum of 6%.
Minimum Contribution 3% given to all employees regardless of participation 100% up to 3% plus 50% of next 2% 100% up to 4% 100% up to 1% plus 50% of next 5%
Vesting 100% Immediate 100% Immediate 100% Immediate 2-year Cliff
Discrimination Testing Automatic Pass Automatic Pass Automatic Pass Automatic Pass

UK auto-enroll regulations also require employer contributions with a minimum contribution of 3% of an employee’s qualified earnings to the pension scheme and require employees to contribute at least 5% of qualified earnings. However, employers have the flexibility to increase their contribution, thereby lowering the employee’s contribution.

Many UK employers choose to contribute more than 3% of an employee’s earnings in order to lessen the financial burden an employee may experience by contributing the required 5% of earnings. The Pensions Regulator is flexible in this type of arrangement as long as the minimum contribution equates to 8% of eligible earnings.

UK Auto-enroll requirements as of 2022 are a minimum of 3% Employer / 5% Employee of qualified earnings:

  Employer Minimum Contribution Employee Minimum Contribution
up to 5 April 2018 1% 1%
6 April 2018 - 5 April 2019 2% 3%
6 April 2019 onwards 3% 5%

The Pensions Regulator in the UK requires employers to auto-enroll newly eligible employees, but the US does not have this rule. However, many US employers opt to auto-enroll their new employees. Both schemes are similar in that they allow employees the ability to opt out of participation. Over the years, employers and governments alike have realized that the success of the retirement plans depends on employee participation.

Similarities between the plans

Both the US Safe Harbor 401(k) and the UK Defined Contribution Scheme

  • are defined contribution plans that serve as retirement nest eggs.
  • are open-architecture plans that provide a wide array of funds from which the employee and employer can choose. In the US, the typical offering is six to nine funds, while in the UK, it is not unheard of for an administrator to offer more than 100 funds.
  • have tax-favored status or are exempt from Income Tax and National Insurance.
  • provide an array of investment funds from which the member can self-direct their investment(s.)
  • allow employees to reap the reward or suffer the loss based on their investment choice(s).
  • provide for survivor benefits.
  • are subject to oversight—by the Department of Labor (DOL) and Internal Revenue Service (IRS) in the US and The Pensions Regulator and Pensions Ombudsman in the UK.

Who bears fiduciary responsibilities?

Fiduciaries are responsible for selecting and monitoring plan service providers and selecting and monitoring the plan’s investment options.

Fiduciaries of 401(k) plans take on the added burden of potentially being held personally liable if they don’t always act in the best interest of the participants and monitor all providers or if the investments perform poorly. Plan members can file a complaint with the IRS and DOL if there is a perception the plan is not being administered according to the Summary Plan Description (SPD). Examples of complaints could include:

  • incorrect contributions
  • contributions made in an untimely manner.

The Pensions Regulator in the UK squarely places the burden of being the plan fiduciary on the pension administrator rather than the employer. The fiduciary is independent of the employer and is responsible for selecting investment options, monitoring investment performance, and ensuring the scheme is compliant with all regulations.

Employers are not required to perform internal audits or form an investment committee. However, it is recommended to perform payroll audits regularly (at least once per quarter and at the beginning of the tax year) and after the first payroll. Scheme members who have reason to believe the plan administrator or employer has been negligent in administering the scheme may file a complaint with the Pensions Ombudsman.

If you have further questions about your retirement plan, we are here to help. Please contact your Woodruff Sawyer representative.



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