The Benefits of 401(k) Automatic Enrollment

Beginning in 2025, certain businesses with retirement plans that were established after December 29th, 2022 will be required to include an auto-enrollment feature in their plans. Auto-enrollment allows employers to enroll their employees into their company-sponsored retirement plan automatically. Your clients may be concerned about this new law costing them more money in the long run, but with this informative guide, you can help turn their pain points into sighs of relief.

Key Takeaways:

• Employers who add an automatic enrollment feature to their existing 401(k) or start a new plan that includes auto-enrollment, may be eligible for a tax credit of $500 per year for three years.
• Automatic enrollment has been shown to result in increased employee participation in a company-sponsored retirement plan.
• Enrolling employees in the plan automatically can help to give them a head start in saving for retirement.
• After the initial plan setup, maintaining auto-enrolled participant accounts is a simple process.

401(k) automatic enrollment can equate to tax savings:

Are your clients aware that with the SECURE ACT, certain businesses that adopt a 401(k) automatic enrollment feature may receive tax credits? If your clients meet the following criteria, they should be eligible to receive this tax credit:

• They have 100 or fewer employees who received at least $5,000 the preceding year.
• They had at least one participant that was not a highly compensated employee.
• In the previous three tax years, their employees weren’t benefitting in another plan sponsored by the employer.

Your qualifying clients stand to save on taxes simply by automatically enrolling their employees in their company-sponsored retirement plans.

But when it comes to numbers, seeing is believing. As the financial advisor they trust, you can show your business-owning clients their savings potential with our ePlan Services tax estimator. Presenting your clients with their potential tax savings in real time might be just what is needed to encourage business owners to make a smart choice for their company and their employees.

401(k) automatic enrollment is more streamlined than the normal process:

Once your client has completed the initial plan setup by drafting a plan document, arranging a trust for the plan funds, setting up a recordkeeping system, and notifying plan participants (employees), they can get back to building their business. They won’t have to continue to make manual changes like the normal 401(k) management process.

After eligible employees receive their required Automatic Enrollment notice, which covers plan details and participant rights including deferral percentage, default investment, and the participant’s right to change their contributions or opt-out, they will be automatically enrolled in the plan at a default contribution rate which comes directly from their paycheck each pay period. Participants always have the option to opt out of contributing to the plan or may contribute a different amount. This makes it easy for participants to save for the future and for employers to stay focused on the bottom line while ensuring their employees are taken care of.

401(k) automatic enrollment may help increase employee participation: Another benefit of implementing auto-enrollment in retirement plans is that it increases employee participation. Typically, employees who are automatically enrolled in a company-sponsored retirement plan are more likely to stay enrolled. According to the U.S. Bureau of Labor and Statistics, in 2022, 41% of non-union workers and 51% of private union workers who participated in a company retirement plan had automatic enrollment. Imagine how much more participation and employee retention you stand to gain this year and the years to come by implementing automatic enrollment. Having more non-highly compensated employees participating can also help nondiscrimination testing results.

401(k) automatic enrollment helps employees save for retirement:

If your clients are still hesitant to include an auto-enrollment feature in their plan, remind them of the 2025 requirements, and that they have an opportunity to show their employees that they care about their futures. Automatically enrolling their workers in their company-sponsored 401(k) plan will allow their employees to save more for retirement. Not only will this make your clients appear more compassionate to their employees, but their employees will also feel reassured knowing they’re employed by a company that cares about their long-term well-being.

Conclusion:

Advisors, show your clients that 401(k) automatic enrollment doesn’t have to be a cause for concern. It’s quite the contrary. When your clients offer automatic enrollment, they and their employees stand to gain so much more financially. And, because you led them to make such a wise decision, you could become seen as an expert in your field—leading to a potential increase in your book of business.