New Laws on 401(k) Auto-Enrollment: What You Need to Know
Mark Henricks | SmartAsset
May 1, 2023
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.
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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…READ MORE
