Auto-Enrollment Under SECURE 2.0: Why It Matters

“Compound interest is the eighth wonder of the world. He who understands it earns it. He who doesn't, pays it.” These strong words, oftentimes erroneously attributed to Albert Einstein,[1] are painfully true. And the sting is felt by many Americans approaching retirement.

In 2023, the TransAmerica Center for Retirement Research conducted a survey of retirees.[2] Their findings were sobering: 73% of retirees wish they would have saved more consistently, 45% regret not starting sooner, and 56% said they retired sooner than they expected, whether they were financially ready to retire or not. Ouch.

Congress heard the message: Americans need help saving more and saving sooner. And on December 29, 2022, Congress signed the SECURE 2.0 Act, the very first provision of which introduced a game-changing factor: automatic enrollment in workplace retirement plans.

So, what is automatic enrollment? Starting on January 1st, 2025, most new 401(k) and 403(b) retirement plans must include an Eligible Automatic Contribution Arrangement (EACA). Prior to this point, newly hired employees defaulted to not deferring out of their wages into a retirement plan. Automatic enrollment flips that. Now, employees default to saving for their retirement.

Here are the nuts and bolts of the new provision:

1. The company chooses a percentage of the employee’s pay that is to be automatically withheld and contributed to the retirement plan on behalf of the employee. This percentage can range from 3% - 10%.
2. On the first day of each subsequent plan year (so, January 1 for a calendar-year plan), this percentage will be increased by 1%. 
3. The employer will also choose a ceiling at which the deferral rate of an employee will be capped at. This ceiling is required to be at least 10% but no more than 15%.
4. Employees can always opt out of automatic enrollment and escalation. This provision does not restrict any liberty of the employee; it only ensures that the default is to save for retirement.

There are a few categories of 401(k) and 403(b) plans that are not mandated to implement an EACA. Firstly, churches and governmental organizations are exempt. Additionally, companies with 10 or less employees are not required to automatically enroll, along with businesses of any size during their first three years of existence. And lastly, retirement plans implemented before the SECURE 2.0 date (December 29th, 2022) are exempt as well.

Why does all this matter? The principle of the time value of money can be stated as such: Money + Time = Much More Money. Many Americans regret not saving enough for retirement. Automatic enrollment is Congress’ attempt to aid employees in saving for retirement.

Need help navigating these changes? At Brown Edwards, we specialize in answering your retirement plan questions, administering retirement plans of all types, and helping business owners design new plans that fit their financial goals. Whether you’re looking to stay compliant with SECURE 2.0 or create a retirement strategy customized to you, we’re here to make it simple and stress-free. Let’s talk about how we can help you build a stronger financial future. My email is jfisher@becpas.com.

[1] https://www.morningstar.com.au/investing/einstein-and-the-magic-of-compounding

[2] https://www.fedweek.com/retirement-financial-planning/most-retirees-later-career-workers-wish-they-had-saved-more-poll-finds/