All Guideline 401(k) plans include a form of an automatic enrollment provision, which means your employees are automatically enrolled in your plan at your default deferral rate. For most plans effective on or after December 29, 2022 the default rate will be at least 3%. Each year thereafter the deferral rate will automatically increase by 1%, up to a maximum set by the plan which must be at least 10% but cannot be more than 15%. Any employees who do not wish to contribute can choose to opt out before or after the auto-enrollment deadline. They can also change their deferrals to a lower or higher percentage based on their preferences and goals. The automatic increase will only apply to participants who are still auto-enrolled.
The major advantage of automatic enrollment for employees is that it encourages them to save for retirement by making a salary deferral the default, rather than waiting for employees to take action to enroll.
However, there are also plenty of advantages of automatic enrollment for employers, as well, including:
Helping employees start preparing for retirement as soon as they are eligible.
As employees enroll sooner, they generally have higher account balances over time.
Increased plan participation, which can have a favorable impact on compliance testing.
Like all 401(k) plans, those with auto-enrollment have significant tax advantages for employers, including deductions for employer contributions (otherwise subject to tax).
Of course, with the benefits of automatic enrollment also come other considerations employers should examine. For instance:
If you offer employer matching, the total amount you contribute may increase with automatic enrollment.
As contributions occur on auto-pilot, employees can become disengaged and assume the default rate will ensure they save enough for retirement.
Your company’s default rate could be less than what an employee would have chosen if they had manually enrolled themselves.
Nevertheless, at Guideline, we believe automatic enrollment is a powerful tool to help employees on their journey to retirement. You can learn more about the benefits of auto-enrollment for participants here.
This content is for informational purposes only and is not intended to be construed as tax advice. You should consult a tax professional to determine the best tax advantaged retirement plan for you.