SECURE 2.0 and Automatic Enrollment:
What You Need to Know
SECURE 2.0 Section 101 will bring a big change to new workplace retirement plans: mandatory automatic enrollment and automatic increases in savings rates starting in 2025. This change helps employees save for retirement more easily by starting them right away.
What Is Automatic Enrollment?
In the past, employees had to tell their employer to take money from their paycheck if they wanted to save in a company retirement plan, like a 401(k) or 403(b). Over time, automatic enrollment has become more common. With automatic enrollment, employees are signed up for the plan at a set contribution rate as soon as they’re eligible, without needing to do anything. The plan may even increase their contribution rate automatically each year. SECURE 2.0 requires most new 401(k) and 403(b) plans created after December 29, 2022, to automatically enroll eligible employees. While employees don’t have to decide to join, they still have the option to opt out.
Secure 2.0 Requirements:
- Initial Contribution Rate: Plans must automatically enroll eligible employees at a deferral rate of at least 3%, but not more than 10% of their pay. This means that each plan will define the initial contribution rate to apply to employees at the time they become eligible, and the rate chosen by any plan must be at least 3% of pay, but not more than 10% of pay.
- Automatic Escalation: Each year, the amount employees contribute will automatically increase by 1% until it reaches a limit of between 10% and 15% of their pay. No matter the starting contribution rate, an employee’s rate will go up each year after they join the plan until it reaches the cap. Employers can choose to set this limit anywhere between 10% and 15% of pay.
- Employee Opt-Out: Employees can still choose to decline participation or adjust their contribution rate.
Who Is Affected?
- Applies to New Plans Only: This rule covers new 401(k) and 403(b) plans established after December 29, 2022, when SECURE 2.0 was enacted.
- Exemptions: Plans existing prior to SECURE 2.0, small businesses with fewer than 10 employees, SIMPLE plans, new businesses (under three years old), and church or government plans are not required to comply.
What Should Employers Do?
- Plan Ahead: If you’re considering starting a new retirement plan, be prepared to include automatic enrollment and escalation provisions.
- Act Now: Plans implemented after December 29, 2022 should ensure that these requirements are being applied, if applicable.
- Communicate Early: Educate employees about how automatic enrollment works and how it benefits them.
- Opt Out & Refund: Employees who did not take action to opt out before being automatically enrolled can request a full refund. The plan’s recordkeeper fulfills the refund request so employers are not burdended with this task.
- Use Technology: Partner with service providers to ensure that they implement and manage the automatic features.
Final Thoughts
Automatic enrollment is a big step forward for retirement savings, making it simpler for employees to save and for employers to help their teams plan for the future. Research shows that automatic enrollment boosts the number of people taking part in retirement plans, especially those who might not sign up on their own. By making saving the default option it helps reduce the retirement savings gap, particularly for younger workers and those with lower incomes. Automatic enrollment will allow millions of Americans to make genuine progress toward a secure retirement. If you have questions about automatic enrollment or how these changes might affect you or your company’s plan, reach out to ERISA Consultants—we’re here to help.
Justin Bonestroo, MSEA, EA, CPC, CPFA
Executive Vice President, Actuary