Potential 2025 Alteration to 401(k) Plans Might Spur Reluctant Contributors to Boost Their Retirement Funds

Potential 2025 Alteration to 401(k) Plans Might Spur Reluctant Contributors to Boost Their Retirement Funds

Saving for retirement through regular contributions is a great way to secure your financial future, but challenges such as lack of employer-offered retirement accounts and worker participation prevent many, especially low-wage earners, from building sufficient savings.

One obstacle is that not all employers provide access to such plans, forcing employees to save independently in an IRA if they choose to. Even when access is available, many employees fail to participate in 401(k)s or other workplace retirement plans.

A new regulation, effective in 2025, addresses this issue for eligible workers. However, it won't apply to all workers until that time.

The regulation will mandate automatic enrollment

The SECURE 2.0 Act, enacted at year-end 2022, introduced several changes to retirement savings, some of which will only take effect in 2025. One such change is the mandatory auto-enrollment in 401(k)s and other workplace retirement plans for eligible participants.

Currently, participation generally requires opting into the plan, and if you do not, your employer does not withhold funds from your paychecks. This step can cause workers to miss out on contributing for years.

Research shows that auto-enrollment policies significantly reduce participation gaps in workplace retirement savings plans, especially among minorities and lower-wage workers. The total savings can vary based on factors like the percentage of paychecks they defer, but it is undeniably better than saving nothing.

Those who qualify for employer-matched 401(k)s will benefit even more. For instance, if you earn $50,000 and your company matches dollar-for-dollar, up to 3% of your income, you contribute $1,500 and your employer contributes an additional $1,500, increasing your 401(k) contribution by $3,000 in that year. This does not even factor in potential growth from investments.

Who it affects

The regulation won't take effect until January 1, 2025, and not all companies will be affected at that time. If your employer does not provide any retirement savings plans, you will need to save elsewhere. In addition, existing 401(k) and 403(b) plans are exempt from the new rules.

Additionally, the following employers are exempt from auto-enrolling workers in retirement plans if they choose not to:

• Businesses with 10 or fewer employees
• New businesses less than 3 years old
• Religious organizations (churches)
• Government organizations

Since existing plans are exempt and new companies are not required to offer auto-enrollment until they've been operational three years, fewer workplace retirement plans will likely have mandatory auto-enrollment next year. However, this trend may increase over time.

How auto-enrollment works

The law requires that all applicable retirement plans subject to this new rule automatically enroll eligible participants at a minimum of 3% of their salary, with a cap of 10%. Every year, the contribution amount will automatically increase by 1% until it reaches at least 10%, with a maximum of 15%.

You have the option to opt out if you prefer to forgo paycheck deductions or prefer to contribute a lower amount. Just be sure to make the choice. Consult your company's HR department if you have any questions about whether the plan will use the auto-enrollment feature starting next year and how to opt out if you so desire.

Despite the regulation aiming to increase retirement savings, not all companies will be affected immediately. For instance, businesses with 10 or fewer employees are exempt from auto-enrolling workers in retirement plans.

The new regulation also provides an opportunity for workers to boost their retirement savings, as it mandates automatic enrollment in 401(k)s and other retirement plans, potentially leading to higher savings due to employer matching.

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