New 401(k) plans will soon be required to automatically enroll participants in the plan. This provision of the SECURE 2.0 Act, which was passed in December 2022, is designed to increase employee participation in retirement accounts.
The SECURE 2.0 Act automatic enrollment provisions include:
— Beginning in 2025, employers with new 401(k) and 403(b) plans must automatically enroll employees when they become eligible.
— The initial contribution amount must be at least 3% and no more than 10%.
— Contributions increase by 1% each year until reaching at least 10%, but not more than 15%.
— Existing 401(k) and 403(b) plans are grandfathered.
— Small businesses with 10 or fewer employees, businesses newer than three years old, and church and government plans are exempt.
— Individual employees may opt out of the automatic enrollment.
Here’s a look at how automatic enrollment will work, the pros and cons of this new policy and if you should consider opting out.
[READ: How Much Should You Contribute to a 401(k)?]
What Is Automatic Enrollment?
When the new auto enrollment policy goes into effect in 2025, all employees who meet their company’s eligibility requirements for a 401(k) or 403(b) plan will be automatically enrolled rather than have to sign up themselves.
“Automatic enrollment means that employees will automatically contribute to the company retirement plan without having to take any action,” Devin Carroll, financial planner and owner of Carroll Advisory Group in Texarkana, Texas, says.
“For the average worker, this means that instead of waiting until they are settled in their new job, they will begin contributing as soon as they meet the eligibility requirements,” he adds.
Contribution amounts will be set automatically by the employer. The law requires businesses to set the initial savings amount between 3% and 10% of employee pay with a 1% increase each year until the contribution amount reaches at least 10% to 15%. These savings percentages match the standard suggestions from financial experts about how much you should be contributing to your 401(k) plan.
Though many employees will be automatically enrolled, participants have the opportunity to opt-out of their company’s 401(k) plan or to contribute more. You can customize your 401(k) or 403(b) contributions if the automatic options don’t suit your preferences and risk tolerance.
“It’s a welcome change for many workers who don’t take advantage of the program,” Jake Hill, chief executive officer of DebtHammer in Austin, Texas, says.
“With this new policy, companies would enroll employees automatically and begin regular salary deductions for retirement savings. Workers could opt out if they decided it wasn’t feasible for them at the time or change their contributions later on. It is an opt-out system as opposed to an opt-in one,” he says.
Who Will Be Automatically Enrolled in 401(k) Plans?
The SECURE 2.0 bill automatic enrollment policy goes into effect in 2025 and applies to businesses with new retirement plans. The automatic enrollment provisions only apply to new 401(k) and 403(b) plans. Businesses with existing plans are grandfathered, so not all employees fall under the new automatic enrollment rules. Similarly, exceptions are made for businesses with 10 or fewer employees, new businesses less than three years old and church and government services.
[Read: New 401(k) Contribution Limits for 2023]
The Pros of 401(k) Auto Enrollment
Both employers and employees can benefit from the new auto enrollment policy.
On the employer side, the act will bring along some tax benefits and hopefully increase employee satisfaction and retention, Alissa Krasner Maizes, registered investment adviser and founder of Amplify My Wealth in Boca Raton, Florida, says. “Employers will likely benefit from their employees being more vested in staying with their employers.”
Automatic enrollment forces employees to save for the future, even if retirement savings is not a current priority.
“For a variety of reasons many employees put off their enrollment, but auto enrollment should help to overcome procrastination,” Carroll says. “Another benefit is that the auto enrollment deferral rate in many plans is higher than the deferral rate the employee would have chosen. This results in a greater savings level for employees.”
In a summary of the SECURE 2.0 Act, the United States Senate Committee on Finance says automatic enrollment has historically boosted participation in retirement savings plans, especially among Black, Latinx and lower-wage employees. This means auto enrollment could have positive ramifications for closing wealth gaps.
The Cons of 401(k) Auto Enrollment
Auto enrollment contribution rates for 401(k) and 403(b) plans are set by your employer when you are enrolled. If you are automatically enrolled at a low savings rate and forget to change it, you could miss out on the long-term benefits of a higher savings rate and even the full 401(k) match from your employer.
For example, if you are automatically enrolled at a 3% savings rate, but your employer will match up to 6% of 401(k) contributions, you could miss out on half of the 401(k) match.
“When contributions are taken out on autopilot, but without preparation or understanding surrounding contribution rates, asset allocation and Roth options, savers risk missing the mark in terms of building adequate financial reserves for their future needs,” Hill says.
Employees with tight budgets may not appreciate having money taken from their paychecks and deposited in retirement accounts that charge penalties for early withdrawals.
“One of the drawbacks is that some individuals will find the reduction in take home pay difficult, since contributions are automatically dedicated. This is especially the case for those who are living with a limited budget,” Carroll says. “They may not realize that they can opt out or adjust their retirement contributions and investment options.”
[Read: How to Take Advantage of 401(k) Catch-Up Contributions.]
Can You Opt Out of 401(k) Automatic Enrollment?
While auto enrollment in a 401(k) plan can be a good way to increase employee participation, it won’t be right for everyone. You have the option to adjust your contribution amount, select different investment options and opt out of the 401(k) or 403(b) plan.
Maizes advises employees keep an eye out for automated contributions, and that individuals will have the option to withdraw these funds without penalty within 90 days of auto enrollment. After that, there could be a penalty for an early withdrawal, but you can still make changes to your contribution rate or investment portfolio in accordance with your company plan.
Auto enrollment can help more employees prepare for retirement but it’s a good idea to pay attention to how much is being withheld from your paycheck, how those funds are being invested and to make changes if the employer-selected options are not right for you.
“While auto enrollment helps address the shortfall of retirement savings that many people experience and certainly increases the likelihood of employees having a properly funded retirement, employees need to be more involved with understanding their paycheck and personal expense plans to ensure this increase in plan participation does not result in derailing their current finances,” Mazies says.
“Employees also need to be more aware of how much goes into their retirement accounts and ensure their contributions are invested in a diversified portfolio appropriate for their risk tolerance and time horizon,” she adds.
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You Could Soon Be Automatically Enrolled in a 401(k) Plan originally appeared on usnews.com
