Last Updated: September 8, 2023

Auto-enrollment, a feature that automatically registers employees for their company’s retirement plan once eligible, could be a powerful tool in the fight to close the savings gap.

According to the study Auto-Enrollment's Long-Term Effect on Retirement Saving, auto-enrollment can yield serious benefits for a business’s employees. The authors found that employees who were required to opt into enrollment "were more likely to participate and contribute a higher percentage of pay." For certain types of workers, this effect was most noticeable: low-wage earners who were inclined to put off saving were more likely to participate, while younger workers were found to benefit from the early access to compound interest that investing brings.

However, there are always trade-offs to consider when choosing a plan design feature such as auto-enrollment. For some employees, decreasing their take-home pay by even a small percentage can cause financial hardship. Additionally, employees who would prefer not to participate may not appreciate having to choose to opt out. Ultimately, auto-enrollment is just one potential plan feature that will make sense for some businesses but not for others.

In this article, we’ll review what employers need to know about auto-enrollment to make an informed decision about their plan design. We’ll also explore the reasons behind why auto-enrollment is gaining popularity in the world of retirement planning.

What Does “Auto-Enrollment” Mean for Retirement Plans?

Auto-enrollment is a retirement plan feature that automatically signs an employee up for their workplace-sponsored plan once they become eligible to participate. In practice, auto-enrollment makes plan participation “opt-out” by default rather than “opt-in.” By making participation the default status for employees, the feature can help workers save for retirement without having to navigate a sign-up process.

According to proponents of the SECURE Act 2.0, most new retirement plans established after December 29, 2022, will be required to enroll eligible employees automatically. The default elective deferral rate must be between 3 and 10%. This builds upon the original SECURE Act, which offered employers a $500 tax credit incorporating an automatic enrollment feature into their plan.

The Three Types of Auto-Enrollment: BAEA, EACA, & QACA

Broadly speaking, there are three types of auto-enrollment plans: a basic automatic enrollment arrangement (BAEA), an eligible automatic enrollment arrangement (EACA), or a qualified automatic enrollment arrangement (QACA).

Basic Automatic Enrollment Arrangement (BAEA)

Under a plan meeting BAEA criteria, employees are automatically enrolled in their plan unless they choose to opt-out. The plan document specifies the percentage of wages an employee will have automatically deducted, and employees can choose not to contribute or to contribute a different percentage of their pay.

Eligible Automatic Enrollment Arrangement (EACA)

Under a plan meeting EACA criteria, all employees uniformly contribute the plan’s default percentage after being given written notice of the auto-enrollment. Additionally, employees must be allowed to withdraw their automatic contributions and earnings, so long as they do so through the process prescribed by their plan document. On top of this, employees are 100% vested in their automatic enrollment contributions as soon as they’re eligible.

Qualified Automatic Contribution Arrangement (QACA)

Under a plan meeting QACA criteria, employees are uniformly subject to a minimum default contribution rate of 3%, which gradually increases to 6% each year that an employee participates. The default percentage cannot exceed 10%. Additionally, the business is required to make employer contributions and must provide either:

• A contribution of 3% of compensation to all employees, including those who choose not to contribute any amount to the plan; or
• A matching contribution of 100% of an employee’s contribution up to 1% of compensation, and a 50% matching contribution for the employee’s contributions above 1% and up to 6% of compensation. In practice, this leads to a maximum potential employer match of 3.5% of compensation if an employee is contributing at least 6% of their salary. This can be visualized as:

Additionally, employees must be 100% vested in the employer’s contributions after no more than two years of tenure.

Other Requirements for Auto-Enrollment Plans

Importantly, employees in an auto-enrollment plan always reserve the right to opt out of participation in the plan. Auto-enrollment simply makes this the default selection rather than an active choice.

Additionally, auto-enrollment is a feature that can be applied to a wide range of qualified retirement plans. Any plan that allows for elective salary deferrals—such as a 401(k) or 403(b) plan—can have this feature.

5 Reasons to Consider Auto-Enrollment

#1: $1,500 Tax Credit for New Auto-Enrollment Plans

Because of the SECURE Act, businesses can receive up to $500 per year in tax credits for three years if they implement a retirement plan with auto-enrollment features. Even better, if a business already has a retirement plan in place, it can still receive these tax credits by adding auto-enrollment to its current plan. In this way, adding auto-enrollment to a plan can actually make it more affordable rather than less.

#2: Improve Retention Among Employees

In a study published by the International Journal of Education and Research, the authors found that there is a positive relationship between retirement plan participation and employee retention. Additionally, the authors surveyed previous research, finding that 84% of companies offering a retirement benefit believe it improves their retention.

#3: Reduce Financial Stress for Employees

Stress is a cognitively draining emotion, which can leave workers with less mental bandwidth to bring to their jobs. In her report on financial stress and employee performance, Professor Carrie Leana found that professional truck drivers who were worried about their finances were more likely to have a preventable accident than truck drivers with lower stress levels. For this reason, offering a retirement plan can potentially raise employee performance.

#4: Helps Pass Common Compliance Tests

Auto-enrollment can help employers pass the non-discrimination testing certain retirement plans are subject to, a process that helps ensure a business isn’t selectively favoring its highly compensated employees. By automatically enrolling most of a business’s employees into a plan, an employer can rest assured that their lower-wage employees are also reaping the plan’s benefits. It is worth noting, however, that safe harbor plans are already exempted from these requirements.

#5: Help Employees Save Sooner

By enrolling employees into their workplace-sponsored retirement as soon as they're eligible, auto-enrollment helps employees get a jump start on savings. This could be especially impactful for younger employees, as auto-enrollment can help them build a nest egg long before they’d prioritize doing so on their own.

Conclusion: Consider Auto-Enrollment for Your Business's Retirement Plan

Though retirement plans are a great way to save money for retirement, there are always ways to improve the system. Setting up auto-enrollment can unlock a suite of benefits for the businesses who try it, on top of making their employees’ lives both more convenient and secure.
If you think a company-sponsored plan with auto-enrollment would be beneficial to your business, contact Vestwell to determine if you are eligible to receive substantial tax credits, which can help you cancel out administration costs.