The SECURE Act 2.0 contains dozens of changes to retirement plans, but perhaps none bigger than these two: New 401(k) and 403(b) plans will be required to automatically enroll participants in the respective plans, and employee salary deferral rates will automatically escalate each year.
This rule will apply to employers who have started retirement plans after December 29, 2022, and take effect for plan years starting in 2025.
There is an exception for new companies in business for less than three years, employers with 10 or fewer employees, and governmental and church plans.
For plan sponsors, the details include:
- An initial automatic deferral rate of at least 3% of an employee’s salary but not more than 10%.
- Deferrals must be automatically escalated annually at least 1% of salary until the participant reaches a deferral rate of at least 10% but not more than 15% of their eligible salary or wages.
- Employees may opt out of auto-enrollment and auto-escalation.
SECURE ACT 2.0 WILL MAINTAIN MOMENTUM ON AUTO-ENROLLMENTAfter the passage of the Pension Protection Act of 2006, some plan sponsors resisted auto-enrollment, concerned that they would be seen as too controlling in their employees’ lives.
However, with an increased emphasis on financial wellness, auto-enrollment and escalation have become far more common. The number of companies with auto enrollment and auto escalation have increased over time, as have the percentage of plan sponsors.
OVERCOMING PLAN SPONSOR AND EMPLOYEE SKEPTICISM
We’ve seen auto-enrollment and escalation become standard at many organizations with existing retirement plans, even though these plan sponsors may not have been enthusiastic at first.
Many of them wanted to start withholding at 3% or even 2% of compensation. They were first resistant to escalation, fearing that they would go too far and substantially reduce employees’ take-home pay.
The challenge for new plan sponsors will often be the same: overcoming skepticism about deferral percentages starting out too high and worries that auto escalation may do too much short-term pain without a corresponding long-term gain.
THE SECURE ACT 2.0 SIX PERCENT (6%) SOLUTION
With mandating an initial salary deferral level of 3%, the SECURE Act 2.0 falls far short of industry consensus that the average person should be saving 10% to 15% of their salary for retirement.
So what is the ideal starting point? Beginning at 3% and annual 1% increases, that’s at least eight years to reach the 10% mark. A higher floor like automatic deferrals of 6% will help employees reach their retirement goals much faster.
New plan sponsors shouldn’t feel a 6% start is overly paternalistic or interferes with employees’ short-term finances, especially for lower-paid individuals. Employees can change the percentage, cancel auto features or opt out of the retirement plan completely.
But it’s in employers’ best interest to encourage employees to start at 6% and increase deferrals by 1% annually. The more employees save, the less stress they’ll be under — and the boost to financial wellness and productivity is tangible across the organization.
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HUB's Retirement and Private Wealth Specialty Practice professionals offer retirement services to organizations and customized private wealth management services to individuals and families.
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This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.