As a business owner, providing great benefits to your employees can be an effective way to both acquire and retain top talent. And one of the most important benefits you can offer is a company-sponsored retirement plan.
But as the saying goes, you can draw a horse to water, but you can’t make it drink. That’s why more and more business owners are automatically enrolling their employees in company-sponsored retirement plans. If you’re not currently doing so, here’s why you should:
Auto-Enrollment Benefits for Employees
Providing a retirement plan in and of itself is great for current and prospective employees, but automatically enrolling them into the plan can have even further benefits.
Ultimately, the goal for employees enrolled in these plans is to save up for retirement. With auto-enrollment, statistics show that more employees end up contributing into the company’s retirement plan, and 80% of those participants end up increasing their plan contributions over time.
Not only does this increased participation mean more of your employees are saving up, but by also increasing plan contributions, they end up with even more money in their accounts when they do eventually retire.
It’s also an extremely easy way to start saving. Auto-enrollment can be, if an employee so desires, a completely hands-off process. By setting a default contribution amount, you can allow your employees to do nothing at all but sit back, relax, and watch their retirement accounts grow.
In fact, auto-enrollment is so easy, it can help employees start contributing earlier in their careers, which is a key factor in helping them save more money over time.
Auto-Enrollment Benefits for Businesses
Many of the same auto-enrollment benefits for employees also apply to businesses at-large. In the same way that auto-enrollment makes contributing to a plan easier for an employee, it makes operating the plan easier for the business. Because there’s a default contribution amount, and employees often do not stray from the default, it’s easier to calculate and manage employee contributions.
By increasing plan participation, auto-enrollment can also have a favorable impact on annual compliance testing like nondiscrimination tests. Your retirement plan must pass certain IRS compliance tests to ensure it’s fair for all employees. Perhaps one of the simplest ways to ensure a passing test is by auto-enrolling all employees. That way, important plan information gets communicated to all employees and participation within the plan remains high.
Additionally, increased participation in the retirement plan means greater opportunity for tax-free growth, since the assets in your plan grow tax-free. Also, if your plan includes employer-matching contributions, those contributions are tax-deductible. And if those contributions increase with automatic enrollment, you could boost your tax advantage by increasing annual contribution amounts.
Tax Credit From the SECURE Act
Passed in December 2019, the SECURE Act was the largest retirement-focused legislative reform in decades. The changes from this legislation were intended to improve access to and attractiveness of retirement plans to help address Americans’ growing concerns with their ability to save for their own retirement. As such, the SECURE Act provided major benefits for retirees and those looking to retire soon, but it also offered incentives for businesses setting up those retirement plans.
The SECURE Act made a tax credit available to businesses that were just establishing brand new retirement plans. Additionally, a new $500 tax credit was offered to small businesses that add an “auto-enrollment arrangement” to their existing plan. This tax credit comes during the year in which they add the auto-enrollment arrangement and the next two years after adding it. This means that for three years after adding auto-enrollment, you will receive an annual $500 tax credit. Plus, if you’re a business owner establishing a new retirement plan and adding automatic enrollment into that plan, then you’re eligible for both tax credits.
Lastly, employers offering a safe harbor 401(k) plan with an automatic increase (or auto-escalation) feature can raise plan participants' contributions until they amount to 15% of pay, unless participants opt out of these increases. Before the SECURE Act was passed, the cap on default contributions under an auto-escalation program was 10% for safe harbor plans.
How to Get Started
If you think adding auto-enrollment to your company retirement plan is a good idea, you’ll first want to discuss your options with your advisor and work with them to determine the impact of adding it to your plan. Beyond that, it’s a good idea to contact your third-party administrator to discuss the entire process and cost for amending your retirement plan document to have auto-enrollment added.
Finally, you’ll want to make sure everyone is well informed. Send out required communication to plan participants and implement an education strategy around providing information to employees on how to best benefit from automatically enrolling in the plan.
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice.
CPFA, AIF®, QKA Brian leads a highly qualified team and oversees the retirement plan governance and fiduciary responsibilities for his clients, along with their administration, operations and design. He has more than 20 years of broad experience working in retirement solutions, including managing plans for large, multi-hundred-million-dollar corporations as well as small businesses. Brian supports his clients by designing customized retirement plans that are focused on specific goals and...Read More