SECURE 2.0 Act’s Automatic Enrollment Provision: Pros and Cons
The new legislation requires employers to automatically enroll employees in retirement plans like 401(k)s. What are the benefits and drawbacks?
While the SECURE 2.0 Act is making some key changes to the rules for retirement savings, one of its biggest is to employer-sponsored retirement plans. A new provision will require employers to automatically enroll eligible employees in new plans with a participation amount of at least 3%. Why was the change made? And is it a good money move? Let's break it down.
How Does SECURE 2.0 Act's Automatic Enrollment Work?
Starting in 2025, the SECURE 2.0 Act will require companies with new 401(k) plans to automatically enroll their employees into those plans at a minimum contribution rate of 3%, but no more than 10%. This rate will increase by 1 percentage point each year up to 15%. As an employee, you are not forced to enroll. You still have the option to opt-out of the plan completely or change your contribution rate.
This change applies to most companies, but there are some that are exempt from these new rules. This does not cover small companies with 10 or fewer employees, new companies in business for less than three years or church and government agencies. While small businesses are not required to enroll, there is an incentive for them to do so: They could receive a 100% tax credit of up to $5,000 for any administrative costs as well as up to a $1,000 per employee match for the employer’s contributions to any 401(k) plans.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
What Are the Benefits?
The bottom line is that Americans simply aren’t saving enough for retirement. According to a Bankrate survey, 55% of Americans say they haven’t saved enough. Since 401(k)s are an essential part of retirement planning, doing all you can to ensure you’re getting the most out of them is important.
The SECURE 2.0 Act is designed to make it easier for anyone struggling to save and put more money away for their retirement. With automatic enrollment, this can also be a benefit for anyone who might procrastinate about enrolling in their employer’s retirement plan.
Not only will automatic enrollment help full-time employees, but the legislation also expands 401 (k) options significantly to include long-term part-time employees. Beginning in December 2024, part-time employees who work at least 500 hours per year in three consecutive years, are eligible to begin making elective deferrals to their employer’s 401(k) plan. Meaning, if part-time employees work at least 500 hours, but less than 1,000, in 2021, 2022 and 2023 they can begin their deferrals as early as Jan. 1, 2024.
What Are the Drawbacks?
While there are many positives about these new provisions, they could present problems for some people. Even with automatic enrollment, many still won’t be saving enough for retirement. Employees have to make sure they are saving more outside of their 401(k) plans.
If you are a low-income earner, automatic contributions might hurt you because you need that money to cover your monthly expenses. While planning for your future shouldn't take a back seat, don't compromise your present if you need that money to pay your bills and everyday expenses.
What Can You Do Now?
Many rely solely on their retirement accounts, whether it's a 401(k) or an IRA, as their primary source of income in retirement. But that might not be enough. The SECURE 2.0 Act aims to help more Americans reach their retirement goals by presenting more options to investors and allowing companies to help their employees improve their retirement plans.
While it has done a lot of good when it comes to options for employees, the question now is the extent investors will integrate these provisions into their own financial plans and how effective employers will be to help them make any necessary adjustments.
Many of the legislation’s provisions won’t be effective immediately, but now is the time to sit down with a financial adviser to determine how the new rules may impact your financial future.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Tony Drake is a CERTIFIED FINANCIAL PLANNER™ and the founder and CEO of Drake & Associates in Waukesha, Wis. Tony is an Investment Adviser Representative and has helped clients prepare for retirement for more than a decade. He hosts The Retirement Ready Radio Show on WTMJ Radio each week and is featured regularly on TV stations in Milwaukee. Tony is passionate about building strong relationships with his clients so he can help them build a strong plan for their retirement.
-
Setting Objective Criteria for Employee Bonuses Aligned With Company Goals
When employees win, the company wins.
By Stephen Nalley Published
-
A Modern Guide to Money Etiquette: Gifts, Tips, Splitting Bills and More
What is modern money etiquette? The customs for splitting a restaurant check, purchasing a wedding gift, tipping and more have evolved. These guidelines can help.
By Emma Patch Published
-
Potential Ripple Effects of Taxing Unrealized Capital Gains
The proposed tax on unrealized gains would be limited to those with a net worth above $100 million, but some see a broad impact on markets and businesses.
By Brian Skrobonja, Chartered Financial Consultant (ChFC®) Published
-
Succession Musts: Thoughtful Planning and Frank Discussions
When it comes to passing on the family business, you don't want anyone to be surprised about who will control or inherit the business after the owner's death.
By David Handler, J.D. Published
-
Five Keys to Retirement Planning and Peace of Mind
Long, worry-free retirements don't just happen. You have to make them happen. The good news is that it may not be as hard as you think.
By Josh Leonard, Investment Adviser Published
-
Here's How to Find Your Way Out of the Inherited IRA Maze
To navigate complex rules on inherited IRAs and RMDs, start by breaking down key terms and common scenarios. A clearer picture of your next steps will emerge.
By Evan T. Beach, CFP®, AWMA® Published
-
Should You Move Your 401(k) to an IRA Once You Hit 59½?
Some 401(k)s allow for in-service withdrawals at age 59½, opening up greater investment options. Here are three reasons for taking the plunge.
By Joe F. Schmitz Jr., CFP®, ChFC® Published
-
When It Comes to Insurance, How Much Risk Can You Take?
Either you or an insurance company takes on the risk of protecting your belongings from loss or damage. Can you afford to self-insure?
By Karl Susman, CPCU, LUTCF, CIC, CSFP, CFS, CPIA, AAI-M, PLCS Published
-
Five Ways to Minimize a Higher Capital Gains Tax Rate
With Harris’ proposal to raise the capital gains tax rate (which would require congressional approval), investors might want to consider tax-lowering options.
By Michael Aloi, CFP® Published
-
Collar Investing Strategy Can Help Protect Your Nest Egg
Here are some key considerations for using the collar strategy of put options and covered calls to safeguard your wealth in retirement.
By Matt Amberson Published