You may be automatically enrolled in your company’s 401(k) plan next year. Here’s why
If your job offers a 401(k) retirement plan, the amount you take home in your paycheck may decrease if you miss an auto-enrollment email.
Beginning January 1, 2025, many companies will be required to initiate auto-enrollment and escalations for 401(k) plans. This could mean that you are enrolled in your company’s retirement account even if you have previously opted out, and your contribution amount will automatically be set at 3% to 10% of your salary unless you decide to opt out or increase the amount. change.
These changes are part of the SECURE 2.0 Act (Setting Every Community Up for Retirement Enhancement), which aims to encourage more American workers to save for retirement.
Here’s what experts say this could look like and what you need to know about your 401(k) retirement plan.
Read more: Are you retiring? How to Apply for Social Security Benefits
Do I have to take out a pension plan?
No, you are not required to enter into a pension plan, but you may be required to opt out. If you miss this step, you may be automatically enrolled by your employer under the new guidelines.
SECURE 2.0 did not introduce the idea of automatic enrollment. Since 2006, employers have had the option to implement automatic enrollment in 401(k) plans for their employees. About half of employers used automatic enrollment in pension plans in 2023 Association for Human Resource Management.
Instead of employers having the option to automatically enroll their employees, most employers will have to enroll their employees. If your company requires you to automatically enroll in their retirement plan, you will be notified when enrollment occurs and given the opportunity to opt out.
Will my pension premium be increased automatically?
SECURE 2.0 also introduced another automation called auto-escalation, which means that if you’re enrolled in a 401(k), your contributions will automatically increase each year (typically by 1%). So if you saved 3% of your wages in your 401(k) the following year, it would increase to 4%. And the year after that it would go up to 5%, and so on.
“Most people get a raise, so the idea is that once you get used to 3%, an increase to 4% the next year won’t impact your salary,” says Wendy Baker, Assistant General Counsel at Human Interest.
However, that does not mean that you have to contribute the percentage that has been determined for you. You can log into your retirement account and set the percentage or dollar amount per paycheck that makes the most sense for you.
Is my employer obliged to follow these changes in the pension plan?
Whether your 401(k) will change and how much it is likely to change depends very much on your employer. The mandatory components of SECURE 2.0 only apply to pension plans concluded after December 29, 2022.
If your employer has a plan in place before that date, he/she does not have to automatically enroll employees. However, they may decide that even though it is not required, they still want to implement automatic enrollment and escalation.
Employers can also decide whether to automatically enroll only newly eligible employees into the 401(k) or automatically enroll everyone on the payroll. If you got a new job in August of this year and become eligible for a 401(k) through that job in February 2025, you may be automatically enrolled. If you got a new job in June of this year and are eligible in December, that may not be the case. Ultimately, it will be up to each employer to make these decisions.
If you are automatically enrolled in a 401(k), your employer will likely determine your withholding amount. Suppose the employer sets the withholding amount at 3%. With automatic escalation, your contribution amount increases every year, usually by 1% per year.
Why are these 401(k) changes happening?
The idea behind auto-enrollment and escalation is to make saving for retirement easier for employees.
“I’ve encountered too many employees over the past 20-plus years as an advisor who ‘wanted to sign up but forgot,’” says Kristina Keck, vice president and practice leader for Retirement Plan Services at Woodruff Sawyer. “They wish they had been automatically enrolled and have a significant sense of loss because they have missed out on years of savings, plus every missed employer match.”
With automatic enrollment and escalation, you don’t have to remember to enroll in a 401(k) when you’re eligible, nor do you have to remember to increase your contributions over time. You save more for your pension throughout your career and feel more comfortable and secure when you reach retirement age.
Can I unsubscribe from these changes?
If you are automatically enrolled in a 401(k), you can opt out. If your employer registers you, you will receive a message and you can choose to cancel your registration.
If you like the idea of a 401(k) but would rather not save the percentage of your paycheck that your employer sets, you can choose to save more or less. You simply cannot exceed the retirement plan contribution limits set by the IRS. (For 2024, those annual limits were $23,000 for a 401(k) and another $7,500 for people age 50 and older.) And if you’d rather opt out of the auto-escalation portion of the plan, you can do that, too.
When will the SECURE 2.0 401(k) changes go live?
The 401(k) auto-enrollment and auto-escalation components of SECURE 2.0 will launch in 2025. Other provisions of SECURE 2.0 went live earlier this year or will be rolled out in 2025, 2026 and 2027.
