Category: 401(k) Auto-Enrollment

On average, 401(k) plans with an automatic enrollment feature have a 20% higher participation rate than plans without, according to Bankrate.com.

ENTER THE SECURE 2.0 ACT

Automatic enrollment is about to become more “popular.” If you’re a new plan sponsor or contemplating adding a 401(k) plan to your benefits package, the SECURE 2.0 Act may have taken the decision of whether or not to include automatic enrollment in your plan out of your hands. Under the Act’s provisions, starting in 2025, many 401(k) and 403(b) plans set up after 2022 must automatically enroll all employees who meet their company’s plan eligibility requirements.

The SECURE 2.0 Act’s other automatic enrollment provisions include:

1. The plan’s initial contribution amount must be at least 3% and no more than 10%.
2. Contributions increase by 1% annually until reaching at least 10%, but not more than 15%.
3. Existing 401(k) and 403(b) plans pre-Act are grandfathered.
4. Small businesses with ten or fewer employees, businesses newer than three years old, and church and government plans are exempt.
5. Individual employees may opt out of the automatic enrollment.

Connie and her son own Specialty Pet Food and Supplies, a manufacturing business with about 150 employees. She wants to increase the business’s 401(k) plan participation. Connie has read that auto-enrollment can successfully boost participation but wonders if the cost of auto-enrollment is worth the increased participation they may get.

She’s not alone. A Center for Retirement Research study* shows that cost is the most common reason small businesses setting up 401(k) plans don’t go with auto-enrollment.

But Connie may find this isn’t necessarily true in the long run. A professional advisor may be able to show Connie plans that have auto-enrollment and escalation built into their systems and offer legally compliant and effective employee communications as part of their standard services package.

Also, with increasing contribution levels, automatic savings can accelerate asset accumulations and lower plan fees. Auto-enrollment is highly effective but can be more costly.

_{*Center for Retirement Reasearch at Boston College, 2023}

_{Client Profile is based on a hypothetical situation. The solutions discussed may or may not be appropriate for you.}