Money Education: 401k Auto Enrollment and Your Retirement

Auto-enrollment offers a simple and streamlined method to start saving for retirement. It’s typically tied to an employer-sponsored retirement plan to increase the number of participants.

Those who offer auto-enrollment typically want to help ensure that as many people save for retirement as possible. Programs like this are primarily aimed at those who don’t normally think about saving for retirement: younger workers and those who believe they can’t afford to do so.

Recently, SECURE Act 2.0 has created legal provisions to help more Americans prepare for a secure retirement. For instance, it helps incentivize small businesses into offering a sponsored retirement plan by providing tax credits for adopting a 401(k) program. Why? Because 74% of small businesses still don’t offer their employees retirement plans!

But the law also includes an auto-enrollment mandate slated to take effect in the next few years.

So, what is auto-enrollment? And, more importantly, how does it impact your retirement?

What is auto-enrollment?

Auto-enrollment is a process where employees are automatically enrolled into a company’s benefit plan, like a 401k or other retirement plan. Typically, these plans are “opt-in,” meaning that new hires decide for themselves whether they’d like to enroll.

But with auto-enrollment, all new hires would instead have to “opt out” if they’d prefer not to participate in the benefit plan. Otherwise, they’re automatically enrolled in the program. This enrollment can happen immediately or after completing a probationary period, lasting anywhere from 30 to 90 days.

Who does auto-enrollment affect?

Currently, auto-enrollment only affects employees at companies that have an auto-enrollment program.

However, the SECURE Act 2.0 will increase the number of affected workers. The law is designed to help workers save for retirement and includes many helpful provisions. One of those provisions mandates auto-enrollment in retirement plans. Starting in 2025, companies starting a new 401(k) or 403(b) plan will be required to automatically enroll their employees into retirement plans with a minimum contribution rate of 3% to 10%.

This affects businesses that start new 401(k) and 403(b) plans after December 29, 2022.

What are the advantages of auto-enrollment?

401(k) accounts already have many benefits for employees. Initiating an auto-enrollment program can provide additional benefits by simplifying the process right from the start. Some of the most important benefits of auto-enrollment include the following:

• The possibility of increased participation. Studies have shown that auto-enrollment has shown to increase participation in benefits programs.
• Creating default savings for employees. By auto-enrolling employees into a retirement savings plan, employers help ensure that workers create a “rainy day” fund.
• Creates simplicity. Auto-enrollment is a convenient way for employees to enroll in a benefits plan.

Are there any disadvantages to auto-enrollment?

Of course, automatically enrolling in a program can also have disadvantages. Although you can choose to opt out, you could feel that it removes a little bit of your autonomy. It’s a personal choice whether the advantages outweigh the disadvantages. Some common disadvantages to auto-enrollment include:

• Reduced flexibility. Some employees may have changing needs, and auto-enrollment may not accommodate these changing needs within a workforce.
• Limited employee knowledge. Some employees may not fully understand all their options or all the implications of enrolling in a benefits plan or know they have options.
• Ineffective automatic contributions. The optimal contribution amount differs for each employee. For many, the default rate might be either too low or too high. With a streamlined process, they could end up with contributions that don’t suit their needs or lifestyle.

Why choose a 401(k)?

Understanding how a 401(k) can help you is an important first step for retirement saving. For one, it helps you understand what options are available and why you might want to look them over when encountering automatic enrollment.

It also helps you understand why SECURE Act 2.0 focuses so much on trying to help as many people enroll in such programs as possible.

Some of the common benefits of a 401(k) include the following:

Traditional 401(k)s are tax-deferred

Contributions to traditional 401(k) plans are made with pre-tax dollars. This means you don’t need to pay taxes on the money you contribute to your account. This is also true of traditional IRA accounts. However, once you withdraw money from your account, it becomes taxable income.

Please note that Roth IRAs and Roth 401(k)s are the opposite. Employee contributions are made with after-tax income. Whenever money is withdrawn, it will be tax-free. However, employees who make hardship withdrawals from either type of account before age 59 will be charged a 10% penalty fee.

Employer match programs

Employer matching programs are exactly how they sound—employers offer to match contributions made by their employees. It’s up to each business whether they offer this program and how much to contribute.

Most businesses only match up to a specific contribution amount. For instance, if you contribute 5% of your salary, your employer might offer to match the first 3%. They can also use a more staggered approach, offering to match 100% of the first 3%, then 50% of the following 2%.

Employer contributions come with their own annual limits. Because of this, they don’t count toward the employee’s annual contribution limit. These limits change every year. Your individual 401(k) contribution limit for 2023 is $22,500. However, employer contributions can add an additional $43,500 to the account. That makes the entire employer/employee combined contribution limit $66,000 for the year.

Diverse investments

A typical 401(k) portfolio usually consists of diverse investments. Often, these are a combination of stocks, bonds, and mutual funds. These investments are customizable to each plan owner’s needs and risk tolerance. A financial advisor can always help you determine what investments suit you best.

Don't be fooled by #AI and #ChatGPT.  These will not take the place of a financial advisor any time soon.  Please consult with a professional when it comes to investing.