401(k) auto-enrollment in Secure 2.0 to help retirement savers

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Workers will be able to save more easily for retirement with a proposed move that would automatically enroll them in 401(k) plans and other retirement savings plans. 

Among the Secure 2.0 provisions in the massive Congressional year-end spending package is a measure for 401(k) and 403(b) plans to automatically enroll workers in the retirement savings plans, with the option for the participant to opt out. 

The House and Senate both signed off on the $1.7 trillion omnibus spending package, sending it to President Biden to sign into law. Secure Act 2.0 is an update to the 2019 measure formally called Setting Every Community Up for Retirement Enhancement Act.

“This legislation will deliver billions in additional retirement savings to help ease the insecurity and anxiety felt by workers and retirees about having enough money to last throughout retirement,” said Wayne Chopus, president and chief executive of the Insured Retirement Institute.

The bill is projected to increase retirement savings by billions of dollars over 10 years for workers and retirees, including $40.5 billion for new workers with boosted auto-enrollment, according to the Insured Retirement Institute.

“The Act’s reinforcement of auto-enrollment and auto-escalation is particularly helpful, as these features help people to start saving and increase their savings as their careers progress,” said Jeff Kobs, head of John Hancock Retirement’s business consulting group. “While participants can opt out of these automatic features, we’ve seen that once they start, they tend to continue, which puts them in a better place come retirement.”

Under the new provision, 401(k) and 403(b) plans would automatically enroll participants, with the initial automatic enrollment amount being at least 3% but not more than 10%. Each year, that amount would be increased by 1% until it reaches at least 10%, but not more than 15%.

All current 401(k) and 403(b) plans would be grandfathered under the proposal.

There is an exception for small businesses with 10 or fewer employees, new businesses that have been operating for less than three years and church plans. The provision is effective for plan years beginning after Dec. 31, 2024.

“Study after study shows that automatic enrollment increases participation and keeps that participation at that level. It’s much harder to opt out than to just keep saving money that’s out of site, out of mind,” said Ryan Brown, partner and attorney at financial planning firm CR Myers & Associates, a wealth management firm. “Retirement is always a ‘I’ll start next year’ problem or ‘I’ll start when I’m married and making more money’ and it never happens. Auto-enrollment will make it happen and most will stay enrolled.” 

“Hands down, automatic enrollment is the most effective way to get more people to save for retirement. Plans with automatic enrollment have a 93% participation rate – significantly higher compared with the voluntary enrollment plan participation rate of 66%. On average, workers hired into plans with automatic enrollment tend to save more than employees hired under a voluntary enrollment plan design due to significantly lower participation in the latter group,” said Dave Stinnett, head of strategic retirement consulting, Vanguard.

According to an Ariel/Aon-Hewitt study, automatic enrollment helps workers who wouldn’t normally participate in a company’s retirement plan.

“The most dramatic increases in enrollment rates are among younger, lower-paid employees, and the racial gap in participation rates is nearly eliminated among employees subject to auto-enrollment,” the study found.

The study, however, also found that auto-enrollment had the unintended consequence of lowering the average rate at which employees invest in their retirement plans. But that’s where the 1% annual increase should help, experts said.

Read: Many young people shouldn’t save for retirement, says research based on a Nobel Prize—winning theory


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