While retirement plans are the primary long-term savings vehicle for most Americans, there are several ways to incentivize your employees to participate in your company-sponsored plan. Auto-enrollment and auto-escalation are often considered some of the most effective ways to maximize retirement savings.
In this article, we will break down automatic enrollment, automatic escalation, and SECURE 2.0 legislation that may impact your business’s retirement plan.
What Is Automatic Enrollment?
Automatic enrollment is a feature where employees are automatically enrolled in their company’s retirement plan unless they actively opt out or adjust their contribution rate. This approach helps remove the barrier of requiring employees to sign up for the plan, leading to higher participation rates.
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.
Advantages of Auto-Enrollment and Auto-Escalation
Auto-enrollment and auto-escalation work well together to help employees build their retirement savings:
- Increased Participation Rates: Automatic enrollment removes the friction of requiring employees to actively sign up for the retirement plan. This can lead to significantly higher participation rates.
- Encourages Saving: Many employees, once enrolled, tend to stick with the default contribution rate set by the plan. While this ensures participation, it may not result in sufficient savings. Auto-escalation addresses this by gradually increasing employee contributions over time, helping them reach a higher savings rate.
- Employee Retention and Satisfaction: Offering a well-designed retirement plan that includes both auto-enrollment and auto-escalation can improve employee satisfaction and retention.
Types of Auto-Enroll Plans
Auto-enroll plans come in several forms:
- Basic Automatic Enrollment (also referred to as Automatic Contribution Agreement, ACA): Employees are automatically enrolled in the plan unless they elect otherwise. The plan document specifies the percentage of compensation that will be automatically deducted. Employees can choose to contribute a different percentage of pay.
- Eligible Automatic Contribution Arrangement (EACA): These plans are similar to the Basic Automatic Enrollment plans, but the plan’s default deferral percentage is uniformly applied to all employees. If a plan contains an EACA, an auto-enrolled employee can opt out and request the return of their automatic salary deferrals no less than 30 and no more than 90 days after the first salary deferral. An EACA can allow automatically enrolled participants to withdraw contributions within 30-90 days of the first contribution.
- Qualified Automatic Contribution Arrangement (QACA): QACAs are like EACAs for safe harbor plans. QACAs have a minimum default deferral percentage, as well as a minimum and maximum auto-escalation percentage. QACAs require that the employer contributes either a 3% non-elective contribution or matches 100% of the first 1% of compensation deferred and 50% of deferrals that exceed 1% of compensation, not to exceed 6% of compensation with a required vesting schedule for employer contributions of up to 2 years.
Typical vs. “Ideal” Auto-Enroll Percentages
The default contribution rate for automatic enrollment typically ranges from 3% to 6%, though it can be set anywhere between 1% and 10%. Vestwell’s default approach is a 5% savings rate to begin.
However, it’s important to note that financial experts generally recommend that employees strive to save 10% to 15% of their annual salary for retirement. Auto-enrollment is a great starting point, but it’s essential to help employees increase their savings rates over time, which is where auto-escalation comes into play.
What Is Automatic Escalation?
Automatic escalation is a feature in retirement plans where an employee's contribution rate to their retirement savings plan automatically increases over time, typically by a set percentage at regular intervals (such as annually). This increase happens without requiring the employee to take any action, though they can opt out if they choose.
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%. Vestwell’s auto-escalation default is 10%.