Automatic Enrollment 2.0
When employers began automatically enrolling employees into retirement plans, it was a retirement savings game changer. Plans that automatically enroll have seen upwards of 90% employee participation, compared with only 50% participation for plans with voluntary enrollment.
Given automatic enrollment’s success in boosting retirement accounts, how can this effective tool be improved? Enter S.1431 – Retirement Security and Savings Act of 2019, championed by Senators Rob Portman (R-OH) and Ben Cardin (D-MD). Their bill will take this feature to a whole new level by establishing a new incentive for employers to offer a more generous automatic enrollment plan and receive a safe harbor from costly retirement plan rules.
The Pension Protection Act of 2006 authorized employers to add auto enrollment to a variety of retirement plans, including 401(k), 403(b), governmental 457(b), SARSEP and SIMPLE IRA plans. Employers deduct a percentage of each eligible employee’s paycheck and deposit it into the employee’s retirement account. Employees can opt out or change the amount they want deducted.
Close to 50% of all employers utilize automatic enrollment, an increase from 20% in 2008.
The Portman-Cardin legislation, introduced in late 2019, should boost employer participation further. It will provide employers with a tax credit for offering autoenrollment starting at a 6% savings level, up from 3% under current law. Employers will be able to automatically escalate yearly the savings rate up to 10%.
Increasing the amount that employees can initially start saving and coupling that with the power of auto-escalation creates an environment where workers are able to save more, faster. As market fluctuations related to COVID-19 have ravaged many Americans’ retirement accounts, these features in the Portman-Cardin legislation will be key tools to help workers recoup some of their lost savings and ensure a secure retirement.