Automatic enrollment is a widely utilized feature by plan sponsors which, as the title eludes to, enrolls participants into the retirement plan unless they elect to opt-out. In turn, it flips the tables. Instead of participants having to “opt-in” to the plan, they now must “opt-out”. According to a 2016 survey by the Plan Sponsor Council of America, 60% of plan sponsors automatically enroll worked into their retirement plans, which is up 14% from 2011. 73% of plans that automatic enrollment also include automatic increase. Automatic increase is a feature that plans can elect that will increase participant’s contributions annually up to a set cap. For example, a plan could automatically enroll participants at 5% with 1% automatic increase up to a cap of 10%. Participants again have the option to opt-out by lowering, stopping or increasing their contributions at their own discretion. As these features are becoming more utilized and common place in the retirement plan landscape, it is important to consider some of benefits of adding these features to your retirement plan.
Increased Participation Rate:
According to a study published by Vanguard in February of 2021, automatic enrollment triples the initial participation rate among new hires. For plans with automatic enrollment, the participation rate among new hires was 90%. For plans with automatic increase, initial participation rate was 92%. For voluntary enrollment plans, the participation rate among new hires was just 28%. After 3 years, 90% hired under automatic enrollment were still participating, and 93% for automatic increase plans. Comparatively, voluntary enrollment plans had just a 29% participation rate after 3 years.
Increased Contributions to the Plan:
According to the same study published by Vanguard in February of 2021, automatic enrollment and automatic increase raises the total contribution levels to the plan. The contribution rate for all eligible employees in the automatic enrollment plans was 5.8% over the 3-year period from January 2017 to December of 2019, compared to just 1.9% for voluntary enrollment plans. nine in ten eligible participants in automatic enrollment plans remain at the default deferral rate or higher after 3 years. For plans with automatic increase, nine in ten participants have deferral rates above the initial default design.
Possible Tax Credits:
In January of 2020, the Secure Act’s changes to retirement plans became effective for most small businesses. Among several benefits such as tax credits for startup costs for new retirement plans, the Secure Act offers a $500 tax credit by adding automatic enrollment to a new or existing retirement plan. This tax credit can be claimed for the first 3 years the feature is enacted, totaling $1,500. For a small business to be eligible, your business must have 100 or fewer employees who were paid at least $5,000 in the preceding year. Your plan must also cover at least one non highly compensated employee.
Much of the data from the recent study from Vanguard shows the benefits of including automatic enrollment in a retirement plan. With the DOL restatement for defined contribution plans required to be completed by July 31st of 2022, now is an excellent time to consider adding this feature to your retirement plan. Please feel free to reach out to myself, or any member of our retirement plan team for more information.
- Vanguard Research https://institutional.vanguard.com/iam/pdf/ISGAE_022020.pdf
- Plan Sponsor Council of America, https://www.psca.org/news/press-room/psca-study-shows-steady-increase-automatic-features
- Employee Fiduciary- Secure Act Credits-https://www.employeefiduciary.com/blog/small-business-401k-tax-credits
Investment advice offered through Marshall & Sterling Wealth Advisors, Inc., a registered investment advisor.
This information is not intended as authoritative guidance or tax or legal advice. You should consult with your attorney or tax advisor for guidance on your specific situation.