Why You Should Add Auto-Enrollment to Your 401(k) Plan: A Smart Move for Your Business and Your Employees

Retirement savings are crucial, yet many employees delay contributing to their 401(k) plans due to financial inertia. People procrastinate, avoid making decisions or assume they’ll start saving later. As an employer, you have the power to change this narrative. 

Auto-enrollment is a feature that automatically enrolls employees in their 401(k) plan at a default contribution rate unless they choose to opt out. It’s the simplest and most effective way to ensure employees start saving for their future.

With the SECURE 2.0 Act’s auto-enrollment requirement for new plans, businesses with existing plans should consider voluntarily adopting this feature, too. The benefits extend beyond financial security for employees. It strengthens your company’s retirement plan, enhances competitiveness and even comes with financial incentives.

Auto-Enrollment is a New Standard in Retirement Plans

SECURE 2.0 requires all new 401(k) and 403(b) plans to automatically enroll employees at a minimum contribution rate of 3%, with automatic increases of 1% per year (up to 10-15%). The only plans that are excluded are those with10 or fewer employees, those employers less than three years old, and government and church plans.

If you’re launching a new plan, you’ll now need to incorporate auto-enrollment. But even if you have an existing plan, voluntary adoption can get you ahead of the curve to reap the benefits. That’s because auto-enrollment is rapidly becoming a standard feature in workplace retirement plans, benefiting both employees and employers. 

Studies have shown that implementing auto-enrollment in 401(k) plans significantly boosts employee participation rates. For instance, the 2024 How America Saves report showed that plans with automatic enrollment achieved a 94% participation rate, compared to 67% for plans without this feature. Similarly, the Plan Sponsor Council of America (PSCA) found that automatic enrollment can increase participation rates by 15 percentage points or more, depending on plan size. 

A financially stable workforce leads to higher productivity, improved retention and a more attractive benefits package. 

Benefits of Auto-Enrollment for Employees

Many employees don’t intentionally avoid saving, they just don’t take the first step. Auto-enrollment removes this hurdle by automatically enrolling employees at a default contribution rate, which they can adjust or opt out of. It helps employees by:

• Encouraging early and consistent saving. When employees are automatically enrolled in a 401(k), they start saving without having to take any action. This eliminates the common barrier of procrastination and ensures they take advantage of the power of compounding over time. A small contribution today can grow significantly over the years, setting them up for long-term financial security.
• Increasing retirement readiness. Many employees simply aren’t saving enough for retirement. Auto-enrollment helps build their financial foundation, reducing their reliance on Social Security and ensuring they have the funds needed for a comfortable future.
• Taking the guesswork out of retirement planning. Some employees avoid enrolling because they don’t know how much to contribute or where to invest. Auto-enrollment removes this hurdle by setting a default contribution rate and providing pre-selected investment options, making the process effortless.
• Helping overcome behavioral biases. People put off financial decisions, even when they know they shouldn’t. Auto-enrollment flips the script by making saving the default option. Instead of having to opt in, employees must opt out, which significantly increases participation rates.

A financially secure workforce is also more engaged and productive, benefiting the overall business.

Benefits of Auto-Enrollment for Employers

Auto-enrollment is a strategic advantage for employers. Here’s how it strengthens your business:

• Enhances employee financial well-being. Financial stress impacts productivity. By helping employees save for retirement, you’re not just improving their future, you’re improving their performance and focus at work today.
• Improves plan participation rates. Higher participation rates strengthen your company’s 401(k) plan. A well-participated plan is more likely to pass nondiscrimination testing, ensuring compliance and reducing administrative headaches.
• Attracts and retains talent.  Employees today expect strong benefits, and a 401(k) with auto-enrollment signals that you care about their financial future. This gives you a competitive edge in attracting top talent and keeping your best employees around.
• Tax credit for implementing auto-enrollment. Small businesses (up to 100 employees) that add auto-enrollment may qualify for a $500 annual tax credit for up to three years, helping to offset administrative costs. 

By leveraging these benefits, businesses can support employees’ long-term savings while enhancing their overall benefits package.

How Auto-Enrollment Compares to Other Retirement Plan Enhancements

While auto-enrollment is a powerful tool, it’s worth comparing it to other ways to improve your company’s retirement plan:

• Employer matching contributions. While valuable, matching requires employees to enroll first. Auto-enrollment ensures participation from the start.
• Financial wellness programs. Educating employees about financial planning is helpful, but knowledge alone doesn’t always lead to action. Auto-enrollment removes the need for employees to take the initiative.
• Automatic contribution escalation. This helps employees save more over time by automatically increasing their contribution rates annually. However, it relies on employees being enrolled in the plan in the first place. Auto-enrollment ensures that employees are participating from day one, providing a strong foundation for contribution escalation to build upon.
• Roth 401(k) options. Employees contribute after-tax dollars for tax-free withdrawals in retirement, which is an option for tax diversification. However, employees must actively choose this option, which can be a barrier. Auto-enrollment ensures participation first. By combining simplified pre-tax and Roth options, employers can enhance participation and help employees build a tax-efficient retirement strategy.

Implementing Auto-Enrollment in Existing Plans

If you’re looking to voluntarily adopt auto-enrollment on your existing plan, here are your options:

1. Full auto-enrollment. Enroll all employees who are not currently participating.
2. Partial auto-enrollment. Apply it only to new hires.
3. Automatic contribution escalation. Gradually increase employee contributions over time.

Clear communication is key. Employees should understand they can adjust their contributions or opt out at any time, ensuring they feel in control while benefiting from the system.

Consider educating your workforce through regular educational workshops or webinars. And be sure to make this part of all onboarding sessions for new hires. Touting the long-term benefits and providing real-world examples can make the benefits tangible. 

Addressing Common Employer Concerns

Some employers hesitate to adopt auto-enrollment due to concerns about employee resistance, administrative complexity or investment choices. Here’s why these concerns are manageable:

• Employees can opt out. Auto-enrollment is a nudge, not a mandate. Employees can change their contribution rate or opt out entirely. Most don’t, and those who do still have the option to enroll later.
• Controlled contribution rates. Most plans start at 3% and gradually increase, keeping contributions manageable while fostering long-term savings. It helps employees save more over time without feeling a financial pinch.
• Simplified investment choices. Default investments, such as target-date funds, adjust over time to align with employees’ retirement goals, making investment decisions easier.

By implementing auto-enrollment, you not only help employees build long-term financial security with minimal effort but also strengthen your benefits package, boost participation rates, ensure compliance and even qualify for valuable tax incentives. It’s a smart, low-risk investment in your workforce and your business.

Is Your Business Ready for Auto-Enrollment?

If you already offer a 401(k) plan, adding auto-enrollment is one of the most impactful ways to boost participation and enhance your benefits package. It’s a win for you and for your employees. And with SECURE 2.0 making auto-enrollment mandatory for new plans, now is the perfect time to revisit your retirement plan strategy so your benefits remain competitive. 

Take the next step and talk to your retirement plan provider today about adding auto-enrollment. A small change can have a significant impact on your employees’ financial future and your company’s overall success. Plus, the tax incentive from the government to help your employees build wealth is a nice bonus. 

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