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March 22, 2023 | Article | 5 min Business insights

How Will You Embrace the Automatic Age?

Since the beginning of time, there have been several ages that reflect society propelling itself forward in physical, intellectual and technological ways. First, there was the Stone Age. Then came the Iron and Bronze Ages (not to mention the Golden Age and the Age of Enlightenment).

Welcome to the Automatic Age

Section 101 of SECURE Act 2.0 requires new 401(k) and 403(b) plans to automatically enroll participants, with the initial automatic enrollment amount being at least 3% but not more than 10%. Each year, that amount must be automatically increased by 1% until it reaches at least 10%, but not more than 15%.1 However, plans that existed on or prior to the December 29, 2022, signing of the SECURE Act do not have to follow this new provision — they were grandfathered in.

Breaking Down the Grandfather Clause

Just how many plans are out there right now that haven’t yet embraced the Automatic Age? According to the Society for Human Resource Management's 2022 Employee Benefits report2(based on responses from 3,129 human resource professionals across the United States), only about a half of the plans automatically enroll new or existing employees, and only 26% automatically increase employee contributions annually. Vanguard’s “How America Saves 2022” report3 reveals that 56% of Vanguard plans have adopted automatic enrollment and two-thirds of those plans have implemented automatic annual deferral rate increases. PSCA’s 65th Annual Survey (most recent) puts those figures at 59% (auto-enroll) and 78% (auto-increase).

Embracing the Numbers

For several years now, the case has been made that automatic enrollment and escalation plan features work. According to a 2012 ground-breaking Ariel/Aon-Hewitt study, automatic enrollment helps workers who wouldn’t normally participate in a company’s retirement plan. “The most dramatic increases in enrollment rates are among younger, lower-paid employees, and the racial gap in participation rates is nearly eliminated among employees subject to auto-enrollment,” the study found.4 More recently, John Hancock’s “State of the participant 20225 report found that auto-enroll/auto-increase features used in tandem greatly enhance a participant’s chances of achieving retirement readiness.

Plan Design % Retirement-Ready 2020 % Retirement-Ready 2022
No auto features 46% 52%
Auto-enroll at 5%+ 48% 56%
Auto-enroll at 5% with annual increase starting at 1%, up to 10% 55% 65%

The majority of surveys and research reports addressing automatic features show that adoption, usage and effectiveness are on the rise from previous years, which is cause for great optimism. However, they also suggest that there is still more work ahead for many plan sponsors and advisors in the Automatic Age.

1Employees may opt out; in addition, there is an exception for small businesses with 10 or fewer employees, new businesses that have been operating for less than three years and church plans.

2The Executive Summary of the Society of Human Resource Management’s “2022 Employee Benefits Survey” can be viewed at: Executive Summary.

3Vanguard’s “How America Saves 2022” can be viewed at: how america saves.

4Senate Finance Committee, SECURE 2.0 Act of 2022 ; Section 101.

5John Hancock’s “State of the participant 2022” can be viewed at: state of the participant.

Heartland Retirement Plan Services are offered through Dubuque Bank and Trust Company. The information provided herein is general in nature and is not intended to be nor should be construed as specific investment, legal or tax advice. The factual information has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. Heartland Retirement Plan Services makes no warranties with regard to the information or results obtained by its use and disclaims any liability arising out of your use of, or reliance on, it. Products offered through Heartland Retirement Plan Services are not FDIC insured, are not bank guaranteed and may lose value, unless otherwise noted.