What Is an Automatic Enrollment Plan?
An auto-enrollment plan is a retirement savings plan in which employees are automatically enrolled to contribute a certain amount of their salary each paycheck. Auto-enrollment plans don’t require the employee to take action or to consent to participate in an employer-sponsored retirement plan explicitly. In such plans, the employer decides what percentage of the employee’s paycheck will automatically be placed in a retirement account—typically around 6%—and decides whether to increase that percentage each year.
As an example, let’s take company ABC and employee Jane. ABC Company has automatic enrollment and a pre-set savings rate of 6%.
Jane becomes eligible for the plan on their next payroll date, slated for March 1st. This means that on March 1st, if Jane still needs to update her deferrals, she will have the 6% deducted from her pay to contribute to her retirement account.
But don’t worry, Jane has options, and so do you!
Why Do Employers Decide to Adopt Automatic Enrollment?
Many employers choose to set up automatic enrollment in their company’s retirement plan to help their employees save for retirement. Studies show this has helped employees avoid missing enrollment periods and contribute more towards retirement. Some benefits of auto enrollment for employees include:
- Simplifies the saving process by automatically enrolling employees in their company’s retirement plan
- Encourages employees to start saving early, boosting long-term financial security
- Removes the burden of having to take action to participate, leading higher participation rates
Additionally, many employers are required to add auto-enrollment to their plan. Starting 1/1/2025, under the SECURE Act 2.0, new 401(k) and 403(b) plans established after the passing of SECURE 2.0 (December 29, 2022) must automatically enroll all eligible employees at a default contribution rate between 3 and 10% of their salary, unless an alternative rate is selected by the employee.
How Do You Know if Your Plan Offers Automatic Enrollment?
Log in to your Vestwell account. On the home page, you will see the "Savings Rate" box, which shows your current deferral election. You are automatically enrolled in your plan if you see a pre-selected amount listed.
You can also find the auto-enrollment specifics in your plan documents and notices within the "Documents" tab of your portal. You can find plan documents, notices, and investment comparison charts. Check out your "Summary Plan Description" and "Plan Highlights" for more information.
What Are Your Options?
Even if your employer has a plan with automatic enrollment, you have a number of different options:
- Watch It Grow: Keep the preset savings rate and watch your savings grow. Log in anytime to check your current balance and transactions. Go into your Vestwell saver portal and select the "Account" tab to review your holdings and performance.
- Change Savings Rate: If you would like to change the preset savings rate, change the savings rate to whatever fits your budget. On the home page, under the "Savings Rate" section, select Change Savings. Modify your pre-tax or Roth amount as desired and hit Apply Changes. You can choose to set your savings rate in dollar amounts or percentages.
Please note: It may take one to two pay periods for this change to be reflected.
- Opt-Out: If you have decided this is not the right time for you to save for retirement, you can opt out of the plan directly through the portal. On the Vestwell home page, under the "Savings Rate" section, select Change Savings. Change the pre-tax and/or Roth amount to 0 and hit Apply Changes. Click here for more information on opting out.
It's essential to register and log in to your Vestwell portal to confirm that your retirement account works the way you want it to. Maintain your savings rate with a percentage or dollar amount you are comfortable with.
Now Wait!
Before you make that change, consider that even though saving might temporarily strain your budget, it’s important to start saving for retirement. We challenge you to take advantage of your retirement plan for at least a few months to see the impact!
Setting aside a small amount of your paycheck can add up and make a big difference in your savings when you retire. In addition, if your employer provides a match, you will be taking advantage of a great benefit.
In the example below, an individual has a $45,000 gross annual income.* The light blue area of the graph represents saving just 3% of pay over 40 years. The dark blue area represents a 3% starting contribution with a 1% annual increase until contributions reach 15% and contributions continue for 40 years, with a hypothetical rate of return of 7%.
While $357,628 may not cover every expense during retirement, it could be a decent emergency fund for unexpected expenses that your Social Security income won’t cover. But let’s look at the larger number; by increasing 1% until saving 15%, you could have $1,356,417 for retirement. That’s a big difference! If you are fortunate to have an employer match, you could have even more.
What Is Automatic Escalation?
If your plan also has an automatic escalation feature, your savings rate may be automatically increased annually. The increase will occur on a date and by a percentage determined by your employer. Details are stated in your plan documents and your welcome package.
Automatic escalation stops when you have reached a predetermined percentage, which is also stated in your plan documents. This is another way for employers to help their employees try to achieve their retirement savings goals.
Starting 1/1/2025, under the SECURE Act 2.0, in addition to auto-enrollment at a default savings rate, plans must also automatically escalate contributions by 1% each year until they reach a predetermined rate by the employer, between 10 and 15%.