Debate: Are 401(k) Enrollment Changes in Secure 2.0 Fair?

Our tax experts discuss whether mandatory auto-enrollment is too big a burden on small businesses.

Auto-enrollment in retirement plans has become increasingly common in recent years. Starting with the 2025 tax year, the Setting Every Community Up for Retirement Enhancement (Secure) 2.0 Act will require employers who establish new 401(k) or 403(b) plans to automatically enroll their employees in those new savings plans.

The minimum auto-enrollment contribution rate will range from 3% to 10%. Each year, the minimum contribution rate will increase by 1% until the rate reaches 15%. Under the law, small businesses with 10 or fewer employees and new businesses will be exempt from the auto-enrollment requirement.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about the advisability of making auto-enrollment in retirement plans mandatory.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Bloink
Byrnes

Their Reasons:

Bloink: Automatic enrollment in an employer-sponsored retirement plan has been proven effective. Employees always have the option of opting out of auto-enrollment. However, most employees elect to continue saving. On the flip side, when merely given the option to enroll (or not enroll) in a retirement savings plan, many employees don’t participate in the plan for one reason or another — leading to a situation where those employees may not have the retirement savings they need for the future.

Byrnes: Yes, automatic enrollment features have been shown to increase participation in retirement savings plans, especially among lower-income taxpayers. On the other hand, however, studies have now found that these auto-enrollment features can be much more costly to administer. Those costs tend to weigh most heavily on the small-business owners whom we want to encourage to offer retirement plans in the first place. Those employers shouldn’t be forced to bear the burden of a mandatory auto-enroll policy.

Bloink: Most of the time, employees who don’t participate in retirement plans fail to contribute because they simply forget to enroll or don’t have the time to consider their options. Others may be confused by those options and forgo the option merely because they don’t fully understand the benefits of enrolling in the plan and making automatic salary deferrals. Automatic enrollment eliminates many of the key reasons that employees fail to contribute what they can afford to save.

Byrnes: When we’re talking about larger employers, the cost of the auto-enrollment plan can be spread over many different employees. Sometimes thousands of employees. Smaller businesses don’t have that luxury. It’s been shown that auto-enrollment costs over $200 more per employee than active choice options. So, it’s possible that mandatory auto-enrollment could actually discourage small businesses from offering any type of retirement savings plan at all.

Bloink: We have to weigh the benefits of automatic enrollment against the burdens. There is always a cost when it comes to administering new programs. Rather than backing down in the fight to ensure that these new mandatory auto-enrollment provisions become effective, we should look for ways to reduce costs or increase incentives for small-business owners searching for ways to offer this valuable retirement savings benefit to employees.

Byrnes: Employers should, of course, have the choice of adopting an automatic enrollment feature when it comes to their retirement plans. However, they shouldn’t be forced into a mandatory program of auto-enrollment regardless of the cost. The bottom line is that we have to expect that these employers will weigh the financial costs to them more heavily when deciding whether to adopt a new plan — and many will choose to eliminate the additional costs by not offering a retirement savings option in the first place.

Images: Adobe Stock

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