Automatic Enrollment in Retirement Plans: What You Need to Know

Automatic enrollment is a feature that allows employees to be automatically enrolled in their company's retirement plan, usually at a default contribution rate, unless they opt out. This means employees start saving for their future without having to take any action – great, right?

 Why is this important? Well, according to the Employee Benefit Research Institute (EBRI), automatic enrollment significantly boosts participation rates in retirement plans. In fact, EBRI reports that participation rates can exceed 85% with automatic enrollment, compared to around 60% without it. That's a massive difference! This feature is especially beneficial for younger employees and those who might not otherwise prioritize retirement savings.

 Statistics show that automatic enrollment particularly helps groups who are often underrepresented in retirement plan participation. For instance, the Vanguard Group's "How America Saves" report indicates that automatic enrollment has helped close the participation gap between lower-income workers and their higher-income counterparts. Women and minority employees also see substantial benefits, increasing their overall savings rates and improving their financial security.

However, it's important to consider some of the concerns associated with automatic enrollment. One key issue is the default contribution rate, which might be set too low to ensure a comfortable retirement. Many plans start at 3%, but financial experts often recommend saving at least 10-15% of one's salary. If employees don't actively adjust their contribution rates, they might end up with insufficient savings.

Another concern is the potential for inertia. Once enrolled, employees might not engage with their retirement plan, missing out on opportunities to optimize their investments or take advantage of employer matches. To mitigate this, regular communication and education about the benefits of increasing contributions and choosing appropriate investment options are essential.

 As Plan Sponsors, a significant issue might occur if a company fails to administer automatic enrollment as stated in their plan documents. This can lead to serious problems. This discrepancy can result in compliance issues and potential penalties from regulatory bodies like the IRS and DOL. Ensuring that automatic enrollment is correctly implemented is not just a best practice – it's a crucial compliance matter that protects both employees and the company.

The new SECURE 2.0 legislation requires that all new 401(k) plans started on/after January 1, 2025 include automatic enrollment provisions in their plan design. However, automatic enrollment may not be right for all plans, for a variety of reasons. Automatic enrollment in retirement plans can be a powerful tool to help increase participation rates and promote financial security for a diverse workforce, but it’s not universally appropriate for all new small business plans. If you are interested in setting up a 401(k) plan without a required automatic enrollment provision, you have a very limited amount of time in which to do that - possibly only a couple of weeks left to get the process started, email us today, Christina.Tunison@lpl.com.

This information is not intended as authoritative guidance or tax or legal advice. You should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.

#601003 June2024