SECURE 2.0: Automatic Enrollment

The SECURE 2.0 Act introduced a significant change for many newly established retirement plans. Beginning in 2025, most 401(k) and 403(b) plans established on or after December 29, 2022, are required to automatically enroll eligible employees in salary deferral contributions.

While many employers have voluntarily adopted automatic enrollment over the years, Congress has now essentially made it a requirement for new plans. The goal is straightforward: Automatic enrollment can help increase retirement plan participation and enable more workers to begin saving for retirement.

Automatic Enrollment Essentials

Traditionally, employees had to affirmatively elect to participate in their employer’s 401(k) or 403(b) plan. While this approach gives employees control over their participation decisions, it also means that many employees delay enrollment or never get around to completing the necessary election process.

Automatic enrollment takes a different approach. Instead of waiting for employees to opt in, eligible employees are automatically enrolled at a specified contribution rate unless they affirmatively elect otherwise. Typical ranges for automatic enrollment started between 3% and 10% of compensation and could contain an automatic annual increase (usually 1% per year up to a plan-set maximum).

Many employers have adopted automatic enrollment over the past decade because it has proven to be one of the most effective ways to increase participation rates. Put simply, employees are more likely to save when the default is participation rather than inaction.

What Is the New Requirement?

For plans subject to the new rules, eligible employees must be automatically enrolled at a default elective deferral rate between 3% and 10% of compensation.  If the initial default rate is less than 10%, the plan must also include an automatic annual increase of at least 1% until the employee’s deferral rate reaches at least 10% (but no more than 15%).

Employers have flexibility in selecting both the initial default percentage and the maximum escalation percentage, as long as the plan remains within the limits mentioned above. From a practical standpoint, many employers subject to the new requirement select a 10% default deferral rate. Because the annual escalation requirement only applies when the initial default rate is below 10%, this approach can simplify administration by eliminating the need to track and implement annual increases.

The selected automatic enrollment provisions must be reflected in the plan document and properly coordinated with payroll and recordkeeping systems.

To Which Plans Does This Requirement Apply?

The automatic enrollment requirement applies to 401(k) and 403(b) plans established on or after December 29, 2022. However, several important exceptions apply, including:

      • Governmental plans
      • Church plans
      • Employers that have been in existence for less than three years
      • Employers that normally employ 10 or fewer employees

The rules governing these exceptions can be complex, particularly as businesses grow or experience changes in workforce size. An employer that qualifies for an exception today may not qualify in the future; therefore, most newly established plans are designed with compliant automatic enrollment provisions from the outset. Doing so not only helps ensure future compliance but can also increase employee participation and improve retirement readiness across the workforce.

Other Requirements

Automatic enrollment involves more than establishing a default contribution rate. Plans subject to the SECURE 2.0 mandate must allow employees to withdraw automatic enrollment contributions within the first 90 days if they opt out and decide not to participate. Employers must also provide timely notices explaining the plan’s automatic enrollment features, including default contribution rates, escalation provisions, and employees’ rights to opt out or change their elections. In addition, because automatically enrolled employees may not have taken the opportunity to select their own investments, the plan is required to use a Qualified Default Investment Alternative (QDIA), such as a target-date fund, balanced fund, or managed account, that will be used unless the employee designates otherwise.

Next Steps

Employers with plans established on or after December 29, 2022, should review whether the SECURE 2.0 automatic enrollment mandate applies to their plan. Even for employers that qualify for an exception, automatic enrollment may be worth considering as a tool to increase participation and encourage employee retirement savings. Implementing compliant automatic enrollment provisions can also help prevent inadvertent compliance failures if the employer loses an exception due to growth, workforce changes, or the passage of time.

As always, please contact your Blue Ridge Associates Retirement Plan Consultant for questions about how automatic enrollment impacts your plan.