SECURE 2.0 to expand auto enrollment

A new law will expand automatic enrollment to all newly formed 401(k) and 403(b) plans, which experts say could significantly boost enrollment in retirement plans.

The provision is one of more than 90 in the retirement security package, known as SECURE 2.0, which passed Congress in December and will change the future of the retirement landscape in a myriad of ways.

Starting in 2025, all new 401(k) and 403(b) plans will be required to automatically enroll new employees in their plan, unless they opt out, at an initial amount between 3% and 10%. The amount will then increase by one percentage point annually until it reaches between 10% and 15%. Existing plans will not be impacted, and there are exceptions for new and small businesses, as well as governmental and church plans.

According to David Stinnett, head of strategic retirement consulting at Vanguard Group, the provision is "a very good signal from policymakers that this is the best practice that works."

Vanguard's 2022 How America Saves study shows that employees subject to automatic enrollment in 2021 had a participation rate of 96%, compared to only 66% participation from employees without automatic enrollment, also known as voluntary enrollment.

Craig Copeland, director of wealth benefits research at the Employee Benefit Research Institute, said auto enrollment is effective because of inertia, a behavioral finance term. This means that employees are more likely to participate in the plan because they must take action to opt out rather than opt in.

"What really excites me, and my guess is what excited policymakers about this, is (that) automatic plan design features are particularly effective for younger workers and lower-income workers," Mr. Stinnett said.

The study from Vanguard also shows that plan participation rates differ most for employees who are lower-income. For employees with an income of $150,000 or more, those subject to automatic enrollment had a 98% participation rate, compared to 92% for those with voluntary enrollment. For employees making $15,000 to $30,000, however, those subject to automatic enrollment had an 86% participation rate, compared to just 37% for voluntary enrollment.

Mr. Copeland noted that automatic enrollment could negatively impact low-income, high turnover workers, as it could create issues turning over low-balance retirement accounts. He said rolling over their retirement savings to a new plan "could be a detriment to the low-income, high turnover workers if they need access to that money."

But SECURE 2.0 also includes provisions that codify auto portability and allow the offering of emergency savings accounts. Mr. Copeland said these provisions work together with auto enrollment to alleviate potential issues, adding that "you really need to have those other provisions to go with (auto enrollment) for it to be most effectively increasing retirement security."

The provision will only affect new plans starting in 2025, meaning "the impact is going to be pretty small at the beginning, because only the new plans will be affected," Mr. Copeland said.

Mr. Stinnett noted that while a mandate across the board would have been more impactful, "this is certainly a half step in the right direction."

The How America Saves study also found that 56% of Vanguard plans offered automatic enrollment at the end of 2021, including 75% of plans with more than 1,000 participants.

For employers looking to create a new plan after 2025, Mr. Stinnett said they should consult with their record keeper or financial adviser to work out the details, including mandatory disclosures so employees know about the auto enrollment process.

"The execution is going to be really key for the ultimate success," Mr. Copeland said.