Automatic enrollment takes the guesswork out of retirement savings by automatically contributing a set percentage of your pay to your 401(k). This article explains how it works, its benefits, and how to adjust your contributions or opt out.
Contributing to a 401(k) can seem intimidating, and many employees do not contribute to an available retirement account simply because they do not know where to begin. Automatic enrollment takes the guesswork out of the process and gives you a clear path to retirement savings.
Rather than waiting for employees to opt in, plans with an automatic enrollment feature set a default deferral rate. Once the plan starts, all eligible employees automatically have that set percentage pulled from their paychecks and placed into their 401(k) accounts.
The default rate depends on when the plan was established and whether it qualifies for certain exceptions.
Plans established on or after Dec. 29, 2022 that do not meet an exception to the mandatory automatic provisions (MAP) under the SECURE 2.0 Act, and all QACA plans — the default rate is at least 3% but not more than 10%.
Plans established before Dec. 29, 2022, or plans that meet at least one of the MAP exceptions and are not QACA plans — the default deferral rate can be as low as 1%.
With automatic escalation, participants who have been automatically enrolled will have their deferral rates increased on an annual basis until a certain percentage is reached. The escalation cap depends on your plan:
Plans established on or after Dec. 29, 2022 that do not meet a MAP exception — automatic escalation goes to at least 10% but no more than 15%.
QACA plans established before Dec. 29, 2022, or plans that meet at least one MAP exception — automatic escalation goes to at least 6% but no more than 15%.
You may save more when automatically enrolled at the default rate, especially if automatic escalations are triggered in future years.
Automatic enrollment helps you take advantage of any employer matching dollars to grow your account balance faster.
All automatic enrollment contributions and gains have tax-deferred treatment until distribution.
All 401(k) plans at Gusto Retirement include automatic enrollment. 30 days before the plan start date or before an employee becomes eligible (if feasible), they will get an email notification with their enrollment date.
Employees who do not want to contribute can choose to opt out before or any time after the automatic enrollment deadline. They can also change their deferrals to a lower or higher percentage based on their preferences and goals.
If an employee does not take action by the deadline, their paycheck contributions will be invested into one of Gusto Investments' professionally managed portfolios based on their current age and estimated time until retirement. Employees can always change their investment portfolio by signing in to their Gusto Retirement dashboard and going to the Portfolio tab from the main menu.