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READER RADAR: Tax Credits Sooth Sting of SECURE 2.0’s Auto-Enroll Mandate


There are a lot of optional plan design enhancements to be found in the new SECURE 2.0 Act of 2022—but there’s one mandatory feature that could have effects both positive—and negative. This week we asked NAPA-Net readers to weigh in:

Specifically, beginning in 2025, all new 401(k) and 403(b) plans (which is to say all adopted after 12/29/22) except:

  • businesses with fewer than 10 employees,
  • new businesses less than 3 years old, and
  • churches and governments

Must automatically enroll participants at 3%-10% and increase the rate by 1% per year to at least 10%, but no more than 15%. Of course, employees would have at least 90 days to opt out and take a distribution of any automatic deferrals. 

This also applies to adoption of a MEP after enactment date (based on employer’s adoption, not e­lective date of MEP).

While this is arguably a good thing for participants, and is consistent with the growing trend of employers to not only adopt automatic enrollment but contribution acceleration—but might the REQUIREMENT to do so (even though it doesn’t have to be implemented until 2025) slow new plan adoption? Or might that (potential) hesitation be overcome by other provisions in SECURE 2.0 (notably the generous tax credits for new plans)? 

Well, we asked readers, generally speaking, what impact they thought the new automatic enrollment requirement would have:

33% - I think plans will adopt automatic enrollment BEFORE 2025.

23% - It might produce hesitation, but the SECURE 2.0 tax credits will overcome that.

13% - Don't expect it to have any real impact.

11% - It doesn't take effect until 2025, so no impact.

11% - Oh, it has already caused a pause.

9% - No earthly idea.

Some reader comments:

Plan Sponsors may not know/care about auto enrollment and escalation, but administrators know what a nightmare these "features" can create.

Not right now anyway. Maybe next year it will pick up steam in prep for 2025.

Most plans are moving towards auto-enrollment already so as long as the providers of these plans can assist in administering the auto-enrollment and should be pretty well received. 

Certain industries like clothing or others that might have irregular income will not like auto features.... Translation it might be costly to a business that is either cheap, or does have cash flow issues.

I don’t think businesses will not implement a 401k due to automatic enrollment. If auto enroll is “the way it is” then I don’t see them pushing back. I sold hundreds of small business startup plans in my days at * and I had automatic enrollment on virtually all of them.

While perhaps not the majority, the requirement will nudge many plans to act before the deadline, and help advisors get engaged with more sponsors.

I was tempted by "No Earthly Idea" but I do think the credits will mitigate concerns about the costs of automatic enrollment.  I would note that I think some advisors and TPAs (especially TPAs) will be reluctant about adding some new plans with required automatic enrollment if they don't have confidence in the payroll integration with the recordkeeper and/or confidence in the plan sponsor's commitment and capability.

You left off a choice.  Definitely will cause hesitancy to adopt, which would be my choice.

Most plan sponsors are either going to put the plan in or not regardless of the mandates, I can't imagine there will be much push back.

I think we are going to start talking about it now with our plan sponsors so we are "ready to go"

Better to adjust one's processes now to prepare for 2025.

Our plans require auto at 6% and we rarely have pushback.  Behavioral science has proven the value of auto at 6%... only 9% opt out.

I've been recommending Automatic Enrollment for years.  There's been a clear shift in the Govt pushing employers to ensure that their employees are retirement ready.

I think employers who are amenable to the idea of auto-enrollment will have included it... even without being forced to.  If an employer doesn't see the benefit of auto-enrollment, well.... that's a whole different mindset.

For some employers with low earnings margins (ex: home health care) this is troublesome even though it is a big help administratively.  Frankly they cannot afford the match for safe harbor to pass testing.  Other clients don't seem to have a big issue.

In view of the fact that there is a starter k option with no required employer match, and a matching contribution is required for a safe harbor plan anyway, I think the automatic enrollment requirement is a no-brainer that will have a very positive impact on participation rates.

None of the above. I think it will cause some small employers to not adopt retirement plans due to the additional administrative work required. We already have many small clients who do not want to adopt automatic enrollment due to the additional administrative work required, so making it mandatory will hinder new plan adoption.

Auto-enrollment should be banned, not mandated. 

It's a huge headache for many industries. It is causing significant concern for the administrative and cost burden.

Makes no sense to start a plan without it, then go back and add it.  Might as well put it in from the jump.

I think it depends on the small business and owner objectives. If business doesn't need 401k to attract/keep employees and owner doesn't need to save substantial funds for retirement, I can see them just defaulting employees into state-run plans.

The extra administrative costs are an increased burden.

And then we asked readers, generally speaking, what they thought of this idea—and feelings were, again, “mixed”:

27% - A great idea, overdue.

22% - Something small plan sponsors probably won't want to deal with.

19% - A great idea.

15% - A no-brainer alongside the start-up tax credits in SECURE 2.0!

9% - Unnecessary, and potentially problematic for new plan adoption.

5% - Problematic, considering the timing.

4% - Unnecessary.

We NEED automatic features in order for the average American to have a chance at having sufficient retirement assets. We have all see how minimal opt out rates are with automatic enrollment, so it clearly is an accepted practice to incorporate into a plan design. Yes, there will always be some businesses that are just not a great fit but the positive impact this will have is far greater than the downside of some businesses not implementing a plan due to this requirement.

Creating more retirement security in this country is the right thing to do.

A great idea but also will cause frustration for small plan sponsors initially.

Even though philosophically I agree with it, it is difficult for small plan sponsors...payroll partners need to step up and help us...but not try to take the plans on (because we know we will just end up fixing the mistakes)!

I really hope this will force payroll providers and recordkeepers to streamline the enrollment and payroll process. The mandate may force this technological change.

It defaults employees to making better decisions with the option to opt out. As long as administrative rules do not default plan sponsors to errors (which may be the case), it is a great idea.

wish the minimum amount was higher than 3% and that there were no limits (<10 employees should still be required... similar to state mandates).

It was probably inevitable.

I get why Congress & the industry is pushing automatic enrollment.  My complaint is that the industry still has many kinks to work out with auto enrollment (participants missed/brought in too early, opt-outs & refunds, etc.) and this will either force solutions or cause a big mess.

Auto enrollment is a great idea - yes, a no brainer... and yet there are instances where it doesn't work well.  One situation comes to mind.... many of our non-US clients have employees on the US payroll that are not excluded from the plan per se, but have many very valid reasons for not joining the US plan as it impacts their retirement plans in their home country to which they will generally return within 5 years or less (they work on rotation schedules).

Other Comments

Sponsors are uncomfortable right now with auto enroll and escalation. They'd rather not deal with the payroll side.

Great job ARA!

I think it takes away the hesitation of plan sponsors that feel making a change would be seen as a negative.  Since these would be new plans with no predecessor provisions, it should be no big deal at all. 

The tax credits are the biggest deal for newer plans.

Tax credits are a great incentive and eases the pain a bit.

Movement in the right direction - we mandate health insurance, retirement savings should be looked at the same way in my opinion. We do not need millions more people solely dependent on government benefits to live when they stop working.

Again, behavioral science shows that auto features work. We have mounds of data that show it and as industry professionals, we should rely on that data and advocate for it. Employes can always opt-out so it's not a mandate for them. 

I think the industry is struggling with the execution, but I also think it just got a lot better at creating secure retirement.

The biggest issue with this is who is making those changes and tracking those changes.  If a company changes payroll companies, who is tracking those who are automatic elections and those that aren't.  It doesn't affect companies with less than 10 employees, but those with 20 employees don't have an HR department either.  I think it will slow down SH Match plans for sure but don't see that impact yet. 

I think the ER contribution tax credits are a great win for small businesses. Often the biggest employer cost to offering a plan is the match and the tax credits could make a big difference on that front.

SIMPLE IRA was already the best option for smaller employers, but SECURE 2.0 cemented it. Why would any small employer choose a 401(k), even the Starter(k), over a SIMPLE IRA?

It wasn't well thought out. Auto enrollment doesn't make sense for every business. It will cause many businesses to have a longer eligibility waiting period, which only hurts those who do want to save. What will happen to the small balances? If someone has $100 and the distribution fee is $100, how is that helping someone save for retirement? Who is tracking all of the addresses on employees with small balances?

Tax credits do not incent a small business owner to adopt a plan. They either want to maximize their contributions, or in some cases, provide a plan for their employees. Last Friday, I met with a client that wants to set up a 401(k) for their employees. When I mentioned increased tax credits, the client totally glossed over this benefit. I was disappointed in the reaction. I have yet to have a client get excited about tax credits.

If the company does not have the right individuals in place to execute all these provisions, it will become more of a hassle then a benefit. Or if the technology is not in place to execute, the cost for corrections will outweigh the benefit of the tax credits.

Tax credits won't overcome the administrative burden of requiring auto enrollments. Small businesses don't have HR departments or excess time. Farming this to TPAs and recordkeepers is also going to increase costs. Small business 401(k) plans are already burdens in many cases, this just exponentially increases that burden.

My clients seem to be worried about requiring the Auto-anything. I tend to agree with them that it will create some angst in their workplace.

I know in general most participants don't opt out when automatically enrolled, so I'm hoping this turns out to be a boon for retirement savings.  However, I anticipate some push-back from employers, especially about having to remember to do the auto-increase.  I'm hoping most recordkeepers will be ready to help with this when the time comes.

This is the next stop to forcing everyone into a plan. They refuse to fix social security properly so this is another way to divert attention.

All the statistics show that automatic enrollment is key to overcoming the retirement crisis.

While I love auto enrollment for most plans, there are some industries that will find it very problematic to administer. Companies with lots of turnover like restaurants and retail - big issue for them! But most companies it's a very positive feature.

Auto-enrollment is a bad idea.  Auto-escalation is even worse.  For many, there are better savings options.  Look at these solutions through the eyes of a lower-income family struggling to put food on the table.  Retirement savings isn't as high a financial priority for households as this industry would like to believe.  401(k) contributions can hurt participants financially, even when there's a match. 

I have a feeling that auto-enroll will have a similar effect on employers that it does on employees.  It only affects the procrastinators. Some companies would add this without the mandate, and those who are against it might not offer a plan anyway, and this only reinforces that. Lots of employees allow the auto-enroll to happen because they are being told what to do.  Employers will be no different, they will just go with it because they are being told what to do.  It's not like they will have a choice now.

While great, in theory as most things are, the implementation may not be. I work with plans today that cannot execute auto enrollment properly, and have had recordkeepers fumble with auto escalation. Payroll integration will be key and we have seen this process breakdown significantly over the past year. Companies without a solid HR team/person will likely see pain with this provision.

Most small business owners would like to offer some type of retirement plan to their employees; however, most do not want to force employees to participate if they are not interested. Most small business owners will think twice about the headaches, upset employees and administrative hassle this will cause. Most small business owners will see this as additional government over reach and red tape which they resent.

More employees will want to keep their money and use it now in light of inflation and potential recession looming. Forcing employees into a "mandatory" participation rate (unless they opt out) could be problematic, especially for those who may not understand it, and puts additional burden on employers to explain such things.

This is the next stop to forcing everyone into a plan. They refuse to fix Social Security properly so this is another way to divert attention.

Thanks to EVERYONE who participated in this week’s NAPA-Net Reader Radar poll!