A new law will expand automatic enrollment to all newly formed 401(k) and 403(b) plans, which experts say could significantly boost enrollment in retirement plans.

The provision is one of more than 90 in the retirement security package, known as SECURE 2.0, which passed Congress in December and will change the future of the retirement landscape in a myriad of ways.

Starting in 2025, all new 401(k) and 403(b) plans will be required to automatically enroll new employees in their plan, unless they opt out, at an initial amount between 3% and 10%. The amount will then increase by one percentage point annually until it reaches between 10% and 15%. Existing plans will not be impacted, and there are exceptions for new and small businesses, as well as governmental and church plans.

According to David Stinnett, head of strategic retirement consulting at Vanguard Group, the provision is “a very good signal from policymakers that this is the best practice that works.”

Vanguard’s 2022 How America Saves study shows that employees subject to automatic enrollment in 2021 had a participation rate of 96%, compared to only 66% participation from employees without automatic enrollment, also known as voluntary enrollment.

Craig Copeland, director of wealth benefits research at the Employee Benefit Research Institute, said auto enrollment is effective because of inertia, a behavioral finance term. This means that employees are more likely to participate in the plan because they must take action to opt out rather than opt in.

Impact on low-income workers

“What really excites me, and my guess is what excited policymakers about this, is (that) automatic plan design features are particularly effective for younger workers and lower-income workers,” Mr. Stinnett said.

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