The Pros and Cons of Automatically Enrolling Employees in a 401(k) Plan

Saving for retirement is something everyone knows they should do. But sometimes employees may need an extra push to set aside that money for their future.

Automatic enrollment in a 401(k) plan can get employees saving for retirement and can help you pass nondiscrimination testing by boosting employee participation. Legislators have noted the effectiveness of this solution. Starting in 2025, the SECURE 2.0 Act required most new plans established on or after Dec. 29, 2022, to include automatic enrollment.

There are three types of automatic enrollment you may implement:

A basic automatic enrollment 401(k) plan enrolls employees automatically unless they choose to opt out. The basic plan also specifies the percentage of an employee’s wages that will be automatically deducted from each paycheck for contribution to the plan. However, employees may elect a different withholding percentage.
An eligible automatic contribution arrangement (EACA) is like a basic automatic enrollment plan, but it has specific notice requirements and allows automatically enrolled employees to withdraw contributions within 30 to 90 days of the first contribution.
A qualified automatic contribution arrangement (QACA) automatically passes certain annual testing requirements. It includes features such as a fixed schedule of automatic contributions by the employee and the employer, a special vesting schedule and specific notice requirements.

Administrative costs are often based on the average account balance of participants and your participation.

Do employees favor automatic enrollment?

According to a Pew Charitable Trusts survey, most employees support automatic enrollment. Of those surveyed, 55% said they would stay in a plan if automatically enrolled, about 15% of employees would opt out, and nearly 30% weren’t sure what they would do.

If you have high turnover, automatic enrollment may not be as popular. On the other hand, if your team consists primarily of millennials and Generation Z, this may be a great way to educate them about the importance of saving for retirement.

What are some of the pros of automatic enrollment?

The most obvious advantages of automatic enrollment are meeting legislative requirements and increasing participation in your 401(k) plan. This feature also:

Encourages employees to start saving for retirement
Enables employees to take advantage of matching contributions
Reduces employees’ taxable income since contributions are made pretax

If you have a young employee population, automatic enrollment in a 401(k) early in their careers can lead to better long-term results and improved savings behaviors as they see their investment balance grow.

If you choose to implement a QACA, you may also be eligible for certain safe harbor provisions that make you exempt from annual actual deferral percentage (ADP) and actual contribution percentage (ACP) nondiscrimination testing.

What are some of the cons of automatic enrollment?

Most employees participating in an automatic enrollment plan are contributing only 3% to 5% of their wages. This has led some financial experts to worry that employees may be:

Contributing less through automatic enrollment than they would have elected to contribute on their own.
Taking a hands-off approach to retirement because they assume the savings rate chosen by their employer is enough for a secure retirement.
Unaware of their savings and lose the opportunity for direct investment and increased savings rates over the years.

How do you roll out the new plan or automatic enrollment feature?

Once you have decided to implement a new 401(k) plan that includes an automatic enrollment feature or add it to your existing 401(k), you will need to communicate the option to your employees. Let them know when the plan will begin, the percentage they will be contributing each pay period, and what they need to do if they want to opt out of participating or change their contribution level.

Be sure to use this opportunity to educate employees on the benefits of saving for retirement, even if it’s only a small percentage of their salary. And remind employees that, even though they’ve been automatically enrolled in the plan, they shouldn’t take a hands-off approach.

Encourage employees to consider how much they will save and how they will invest it. While contributing the maximum amount may seem ideal, it’s not always possible. Employees may be facing student debt, medical bills or other financial challenges.

How do you maintain enrollment and encourage contributions in future years?

After your initial implementation, it’s important that you continue to automatically enroll all newly eligible employees. For existing participants, you may increase salary deferrals each year. For example, you may want to increase contributions by 1% each year during open enrollment.

For more information

If you have questions about implementing an automatic enrollment feature, contact us. We can help you determine what type of plan will work best for you.

You may also want to check out the IRS automatic enrollment FAQs.