What You Need to Know about Auto Enrollment
The Basics of Auto Enrollment
If you’re an employee of a company that first established a retirement plan at the end of 2022, chances are you’re covered by that retirement plan as result of auto enrollment.
The law now says that if a business with at least 10 employees started up a 401(k) or 403(b) plan on or after December 22, 2022, the business must automatically enroll its eligible employees in the plan.
The plan may require at least a year of full-time employment before you can enroll. As part of your enrollment, you should receive an auto enrollment notice and a description of the plan, called a Summary Plan Description (SPD), and other documents that explain the features of the plan.
At one time, an employee had to make a proactive choice to enroll in their employer’s plan. For one reason or another, sometimes employees didn’t take that step. The goal of the auto enrollment law is to make it easier for US workers to save for their retirement as early as possible.
Employees always have the choice to disenroll from the plan. If the disenroll during the first 30 to 90 days of being automatically enrolled, they can withdraw the contributions they made during that period. Check with your plan representative about this procedure.
Employees can also choose to remain in the plan but decrease or stop future contributions to the Plan (and possibly resume contributions later). This way, the amount already in the retirement account stays with the plan and generally will build over time.
Tip: Whether your employer is covered by the new law or not, you should ask your employer if they offer a retirement plan. Federal law doesn’t require employers to offer a retirement plan, but many employers do provide a plan as a benefit to their employees. (There are different types of plans—in some plans, only the employer contributes.) If your employer does offer a retirement plan, ask for copies of documents that describe the plan, such as the SPD, automatic enrollment notice, and any other information about the plan. Participating in the plan can help you prepare for retirement.
Contributions to the Plan
As a plan participant, you contribute a percentage of your pre-tax salary to your retirement plan account. The specific percentage can be found in your automatic enrollment notice. For some plans, this percentage can be 3% or less.
You may change your contribution amount (or choose to stop making any further contributions) by notifying your plan.
Unless you change the amount, the contribution rate increases by 1% each year until it reaches a maximum of 10 to 15% per year. The dollar amount of a participant’s contributions is capped by the Internal Revenue Code. This means that once you have been enrolled in the plan, you can decide how much of your salary to contribute to your plan account within these limits. If you want to increase or decrease the amount of your contributions, or stop contributions, the plan will allow you to make that change.
Your employer may also make a contribution. If your employer chooses to contribute, it may be a “matching contribution,” where the employer contributes a percentage of your contribution, or a “non-elective contribution,” where the employer contributes for all eligible employees, even if they don’t themselves contribute. In some rare cases, the employer may make both a matching contribution and a non-elective contribution, but this is less common. In addition to the limit on your own contribution to the plan, there is a second, larger limit on how much you and the employer together can contribute annually to the plan.
The employer match can be a valuable feature of the plan. It means that both your own contributions, as well as the employer contributions, are being set aside and invested for your retirement.
The contributions you make, plus any investment gains (or losses), are immediately vested—meaning they belong to you. Vested contributions can’t be taken away from plan participants. If you leave your employer, you can remain as a participant in that plan and maintain the funds there, take the funds with you, or roll them over.
Depending on the plan’s vesting scheduling, employer contributions may also be vested. A vesting schedule means that a plan might require participants to complete a certain number of years of employment before employer contributions are considered vested. If the employee leaves employment before a plan vesting period is satisfied, the employee may forfeit all or a portion of the employer contributions.
Tip: Ask your plan representative about the contribution percentages for your plan and whether there is an employer matching or nonelective contribution. You should also be able to find this information in the SPD or automatic enrollment notice. If your plan offers an employer match, staying enrolled will mean you have an added boost to your retirement savings!
How Contributions to the Plan are Invested
Most 401(k) or 403(b) plans provide participants a menu of investment options. The people who select these investment options are called fiduciaries – meaning they are required by law to act under a high duty of care to protect the plan and the interests of participants and beneficiaries. The plan will provide information about the available investments, for example information about their risk, rate of return, and investment fees and expenses. Based on that information, plan participants can direct their contributions to the investment options of their choice.
If a participant doesn’t provide investment direction, their contributions will be directed to a qualified default investment alternative (QDIA). QDIAs must satisfy the U.S. Department of Labor’s regulatory criteria and are generally designed for long-term growth and to be diversified to minimize the risk of large losses. The participant always has the option to transfer their contributions out of the QDIA to other plan investments.
Tip: Make regular contributions! Investments can be volatile, but your plan’s investment options should provide a diverse range of options to build your retirement savings.
Why Stay in the Plan After Auto Enrollment?
We all face demands on our budget but, if possible, it’s important to start contributions to your plan early, make regular contributions to your retirement account, and leave the money there.
Keeping your contributions and any matching contributions from your employer in the plan can be an effective and powerful way to save for retirement. Ideally, you will continue to make regular contributions! But if you must stop, leave the money you’ve already contributed in the plan.
The funds you invest will accrue earnings, and those earnings will accrue earnings – in other words, the earnings will compound. Inevitably, there will be losses, too, but studies have shown that, over time, investments will grow. Investment returns will go up and down over the course of your working life, but the longer you save, the better chance you have of providing for a secure retirement.
Tip: The Department of Labor has a good illustration of the value of saving early for retirement.
Citations
- Benefits Law Advisor. Secure Act 2.0. Benefits Law Advisor, www.benefitslawadvisor.com/wp-content/uploads/sites/960/2022/12/Secure-Act-2.0-extract-of-CAA-2023-1.pdf
- Brandolph, David. Vanguard’s Rosy 401k Study Doesn’t Reflect Reality for Most Americans. Pension Rights Center, pensionrights.org/vanguards-rosy-401k-study-doesnt-reflect-reality-for-most-americans/
- IRS. Retirement Topics – Automatic Enrollment. IRS, www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-automatic-enrollment
- IRS. 401(K) Limit Increases to $23,500 for 2025, IRA Limit Remains $7,000. IRS, www.irs.gov/newsroom/401k-limit-increases-to-23500-for-2025-ira-limit-remains-7000
- IRS. Auto Enrollment – Can an Employee Withdraw Any Automatic Enrollment Contributions from the Retirement Plan? IRS, www.irs.gov/retirement-plans/faqs-auto-enrollment-can-an-employee-withdraw-any-automatic-enrollment-contributions-from-the-retirement-plan
- IRS. Retirement Plans FAQs Regarding Automatic Contribution Arrangements IRS, www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-automatic-contribution-arrangements-automatic-enrollment-arrangements
- Thrift Savings Plan. Investing Strategies The Thrift Savings Plan (TSP), www.tsp.gov/investing-strategies/?utm_campaign=64808889&utm_medium=email&utm_source=govdelivery#compound-earnings
