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How Automatic Enrollment Can Level Up Retirement Plans

September 19, 2023

Automatic enrollment in retirement plans is a popular feature that is becoming more and more common in many workplaces. Automatic enrollment means that employees are enrolled in a retirement plan by default unless they explicitly opt-out.

A recent study found that plans with automatic enrollment had a 93% participation rate, compared with a participation rate of 70% for plans with voluntary enrollment.

Legislative Changes

The Secure Act 2.0 of 2022 decreed that beginning on January 1st, 2025, companies with new 401(k) or 403(b) plans must automatically enroll all eligible employees at a pretax contribution rate of at least 3%, but not to exceed 10%. This provision was passed to ensure that employees who are unsure if they are eligible or have not yet enrolled are able to save for retirement.

The contribution should increase by 1% each year, up to at least 10% of the automatically enrolled employee’s income, but not to exceed 15%.

Employees will still have the option to choose their own contribution rate at any point.

For automatically enrolled employees, contributions should be invested into a Qualified Default Investment Alternative (QDIA).

Exclusions of the requirement include:

  • Companies with 10 or more employees
  • Companies in business for less than three years (as of 12/31/2024)
  • Church or government agencies

Benefits of Automatic Enrollment

Attracts and retains employees: Providing a 401(k) plan that has an automatic enrollment feature shows employees that the company cares about their financial future and retirement goals.

Increased participation: Automatic enrollment can significantly increase participation rates in retirement plans. Many employees may not take the initiative to sign up for a plan on their own. When enrollment is automatic, employees are more likely to participate.

Improved retirement savings: By automatically enrolling employees, employers ensure that their workers save at least the minimum amount required by the plan. This can help employees build a financially secure future, even if they don't have the time to actively manage their investments.

Simplified decision-making: Automatic enrollment can simplify the decision-making process for employees. When enrollment is automatic, they don't have to spend time making difficult investment decisions.

Automatic Enrollment Tax Credit: Businesses with up to 100 employees are eligible for a $500 tax credit for a 3-year taxable period by adding an automatic enrollment feature to a new or existing 401(k) plan.

Overall, automatic enrollment can offer a range of benefits for both employees and employers. By increasing participation rates, improving retirement savings, and simplifying the decision-making process, automatic enrollment can help workers prepare for their future and achieve their long-term financial goals.

To learn more about available tax credits, read 401(k) Plans Are Less Expensive Than You Think.

For tips and information regarding retirement plans, contact us.

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