3 Reasons Why Automatic Enrollment is Awesome
Siân Killingsworth / 23 Nov 2022 / 401(k) Plan Information, Retirement Trends, Small Business 401k
55 million American workers—more than 40% of full-time, private-sector employees—don’t have access to a workplace retirement savings plan. As very few employers offer pensions and Social Security is drying up, with funds expected to be depleted as soon as 2035, the responsibility for saving falls more on the individual than ever before.
Automatic enrollment is a retirement plan feature that enables employers to admit new participants into the plan as soon as they are eligible to participate. Instead of the traditional method of waiting for the participant to meet eligibility requirements and then enrolling manually (or not – many eligible employees procrastinate or forget), this lets employers add new eligible participants quickly and easily.
But why is this so great?
The #1 most significant element to impact a plan balance is the contribution rate.
Not investments, not management. Simply contributing to a retirement plan makes all the difference, and we designed our 401(k) plan options with this in mind. Here are three compelling reasons why small business owners should embrace the ease that automatic enrollment options bring to your 401(k) plan:
1. Auto-enrollment makes saving easy for employees
Although a 401(k) plan is the second-most popular employee benefit after health insurance, only a fraction of employees actually participate because they believe that enrollment is complicated.
But a plan with the auto-enroll feature removes that complication and gets employees the benefit they want as soon as they’re eligible to enter the plan without the hassle of completing forms. They can start saving for retirement and accumulating earnings on those savings sooner, which means more money for their retirement!
Employees can always opt out but using auto-enrollment has shown to double or even triple the rate of participation, particularly among younger employees and those earning less than $30,000.
2. Auto-enrollment helps employers attract and retain talent
Staying competitive in the job market is vital in today’s economy. It is becoming ever more important to attract and retain employees—and offering free snacks or a ping-pong table is not going to cut it. Instead, salary, healthcare insurance, and a retirement plan are the top three most critical elements job seekers consider.
Giving your employees a way to save for their retirement is a cost-effective and easy way to attract and retain talent and maintain an edge over the competition.
3. Employers whose plans feature auto-enrollment save on taxes
All employers who open a new 401(k) plan may be eligible for substantial tax credits. You can qualify for up to $15,000 in credits just for opening a new 401(k) plan.
And when you add automatic enrollment, you save even more. This one feature can qualify you for a tax credit worth $500 per year for the first three years of the plan.
These tax credits for your business—a total of up to $16,500—can help small business owners like you save for your own retirements.
A few things to remember:
Ubiquity 401(k) plans offer the option of auto-enrollment with or without auto-escalation (i.e., to have their savings amount increase automatically). Participants can opt out of auto-enrollment at any time to:
- Change their contribution amount
- Make Roth contributions (if available in the plan)
- Opt out of participating in the plan altogether
All contributions made through auto-enrollment remain in the participant’s account even if they opt out within the first 90 days. Once a participant opts out of auto-enrollment, they cannot opt back into having their contribution amount(s) increase automatically if auto-escalation is included in the plan; however, they can change their savings amount at any time.
To speak with a retirement expert on which retirement plan is right for your small business, reach out to Ubiquity today.
1 Eligible employers may be able to claim a tax credit of up to $5,000, for three years, for ordinary and necessary costs of starting a 401(k) plan. IRS’ qualifying factors are: you had 100 or fewer employees who received at least $5,000 in compensation from you in the preceding year, you had at least one participant who was a non-highly compensated employee (NHCE) and in the three tax years before the first year you’re eligible for the credit, your employees were substantially the same employees who received contributions or accrued benefits in another plan sponsored by you, a member of a controlled group that includes you, or a predecessor of either. Those plans with automatic enrollment can claim a tax credit of $500 per year for a 3-year taxable period.
Ubiquity is not a registered investment advisor, and no portion of the material herein should be construed as legal or tax advice. Please consult with your financial planner, attorney and/or tax advisor for advice.