401k Auto Enrollment could become mandatory for many businesses. Congress is currently analyzing a proposal for making 401k auto enrollment more than just an employer design option. It may be only a matter of “when” this feature becomes law. The proposal, a section of the $3.5 trillion Build Back Better Act, was approved last month by the House Ways and Means Committee, as reported by thestreet.com.
Just like other proposals coming out of Committee, the recent progress does not mean the automatic enrollment provision will definitely be signed into law. Legislators could still cut or reduce this section of any bill. In addition, it has not yet passed the House. However, this proposed provision could dramatically impact the way American workers save for retirement. It opens the door for more employees than ever before to have access to a retirement plan. That’s because the provision would require employers with five or more employees to automatically enroll eligible participants into a retirement plan. While the provision would require employers to offer 401k auto enrollment, employees can opt out for any reason. Using a different form of retirement savings is considered an appropriate opt-out strategy.
Implementing this provision is considered a game-changer for retirement savings. It could deliver positive change on savings practices. According to the Center for Retirement Research at Boston College for the past 30 years, only 50% of employees have been enrolled in employer-sponsored retirement plans. With so many Americans woefully under-saved for retirement, widespread auto enrollment could transform the savings practices for America’s workforce.
If passed by both the House and Senate, the legislation would go into effect after Dec. 31, 2021. The provision has support from the American Retirement Association, as well as PGIM DC Solutions, and the Employee Benefit Research Institute. All endorse the idea of bridging the coverage gap in retirement savings. This also reinforces the importance of making the savings process more widely available to American workers. According to PGIM DC Solutions’ David Blanchett, as quoted in thestreet.com article, “this plan will help individuals more than it hurts businesses. Experts say the hardest part of investing for retirement is starting. Guaranteeing the majority of individuals will start saving will exponentially help people retire.” Simply put, automating the enrollment decision makes it possible for more people to save for retirement. While it does create additional administrative and fiduciary responsibilities for employers, the benefits for workers far outweigh the downsides, according to Mr. Blanchett.
Retirement plan sponsors and retirement committees should continue to monitor the situation over the coming months to see what transpires on Capitol Hill. However, another option is available to retirement plan sponsors and retirement committees. They should consider implementing 401k auto enrollment in your current retirement plan instead of waiting to see what Congress decides. Having access to a retirement savings vehicle is a coveted employee benefit. It will certainly help boost employee participation and savings rates regardless of who drives 401k auto enrollment.
