How 401(k) Automatic Enrollment Works

If your employer’s 401(k) plan has auto-enrollment, you’ll automatically start making contributions to your account once you’re eligible. Under a federal law enacted in 2022, most new 401(k) plans must auto-enroll all eligible employees starting in 2025. Existing plans don’t have to auto-enroll participants, and opting out will still be an option for employees of companies that are affected. A financial advisor can help you decide how to save for retirement.

Auto-Enrollment Background

Tax-advantaged 401(k) plans are the most popular retirement savings option offered by employers. Employees of companies that offer 401(k) plans can opt to defer a portion of their salary pre-tax and then invest the money in a mix of stocks, bonds and other investments. This allows them to build their nest eggs tax-free until they are ready to start withdrawing money to pay for retirement.

While 401(k)s offer potent benefits for retirement savers, some employees who could benefit from 401(k) features do not choose to participate. When employees are automatically enrolled in 401(k) and other retirement plans, however, they are more likely to save for their retirement than if they have to sign up for the plans themselves.

New Laws on Auto-Enrollment

The SECURE 2.0 Act is the name given to provisions of the Consolidated Appropriations Act enacted in 2022. The law, which was a follow-up to the original SECURE Act of 2019, aims to help Americans better prepare and save for retirement. Of the 100 or so provisions in the law that affect retirement savings plans, the auto-enrollment requirements are among the most sweeping and potentially significant.

Automatic enrollment will be a part of many more 401(k) plans as a result of these legal shifts. Essentially, instead of being an opt-in way to save for retirement, participating in a 401(k) will now be something that some workers have to opt out of.

When Auto-Enrollment Starts and Who Is Affected

One of the most important elements of the new law is the effective date. Nothing changes with regard to auto-enrollment until 2025. Only after the start of that year will employers whose plans are affected by the changes have to start auto-enrolling new employees.

The auto-enrollment requirements also apply only to new 401(k) plans that have been set up after the end of 2022. Pre-existing plans are grandfathered and can keep doing business as usual when it comes to auto-enrollment. This means that most plans won’t be directly impacted by the change.

Another exception may apply to the type of employer. Small businesses with fewer than 10 employees, new businesses less than three years old, as well as churches and government employers won’t have to offer auto-enrollment.

Finally, only eligible employees will be auto-enrolled. Many 401(k) plans only allow employees who have been on the job for a certain period of time to participate, for example. However, once these employees pass the eligibility date or otherwise become eligible to participate in the plan, they will automatically be enrolled.

How Auto-Enrollment Works

Auto-enrollment won’t make saving for retirement in a 401(k) mandatory. Employees are allowed to opt out in advance and avoid auto-enrollment altogether.

Meanwhile, employees can still opt out if, for example, they were enrolled without realizing it or their financial situations change and they need to stop deferring salary for retirement. If they act within 90 days of being auto-enrolled, they can withdraw funds that were deposited into their account without any penalty. After that, they may be subject to early withdrawal penalties.

Contribution Rates

The law allows employers to set the initial amount of salary that will be deferred when an employee is automatically enrolled in a plan. They can start deferring a minimum of 3% up to a maximum of 10% of the auto-enrolled employee’s salary. Keep in mind that the employee can still choose to increase their deferral percentage.

In addition to setting an initial deferral percentage, the employer can increase the deferral percentage every year. This auto-deferral can be raised by 1% a year, up to a maximum of 15% of the employee’s salary. The employee can choose to let this automatic increase occur or alternatively opt for a lower or higher rate.

Bottom Line

401(k) auto-enrollment promises to increase participation in employer-sponsored retirement saving plans. Under a law passed in 2022, most new plans have to automatically enroll employees starting in 2025. The plan sponsor can decide how much salary they’ll automatically defer for employees, with 3% as a minimum and 10% as a maximum. After that, the plan can automatically increase the deferral amount by 1% a year, up to a maximum of 15%. Employees can still opt out of contributing to 401(k) plans or also choose different salary deferral percentages.

Retirement Savings Tips

Consider asking a financial advisor to help you decide whether and how to participate in an employer-sponsored retirement savings plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
SmartAsset’s retirement calculator can help you estimate how much you’ll need to set aside in order to cover your anticipated expenses in retirement. The free online tool can come in handy as your track your current progress and help you make decisions surrounding how much to save for retirement.