Annual Required Contribution (ARC)

In Detail

The Annual Required Contribution, or Actuarially Determined Employer Contribution (ADEC) as it is now more commonly called, is the amount an actuary calculates a plan sponsor must contribute each year to fund promised benefits. It has two components: the normal cost (the cost of benefits earned in the current year) and the amortization payment (to pay down any existing unfunded liability). For private-sector plans, ERISA mandates minimum contributions that roughly correspond to the ARC, with penalties for underpayment. Public-sector plans have no federal funding mandate — the ARC is a recommendation, not a requirement.

This distinction is crucial because many government plan sponsors have a long history of contributing less than the full ARC, choosing to defer pension costs in favor of current spending on other priorities. When sponsors underpay the ARC, the unfunded liability grows both by the amount of the shortfall and by the assumed interest on that shortfall. This compounding effect means that years of underpayment can create a pension crisis that is far more expensive to resolve later. PensionWatch tracks whether plan sponsors are meeting their ARC as a key indicator of fiscal commitment to the pension system.