Changes to Default Auto Enrollment Rate
Starting with the 2025 tax year, the SECURE Act 2.0 now requires employers that establish new 401(k) or 403(b) plans to auto-enroll employees in the savings plans. The minimum auto-enrollment contribution rate ranges from 3% to 10%, with 3% set as the minimum baseline. Each year, the minimum contribution rate will then increase by 1% until the rate reaches 15%. Recent proposals have advocated to increase the 3% minimum baseline auto-enrollment contribution to 6%.
We asked two professors and authors of Tax Facts with opposing political viewpoints to share their opinions about proposals to change the default auto-enrollment deferral rate from 3% to 6%.
Below is a summary of the debate that ensued between the two professors.
Their Votes:
Their Reasons:
Bloink: We absolutely should seek to raise the default auto-enrollment contribution rate to traditional retirement accounts. The entire point of auto-enrollment is to have taxpayers saving more and saving earlier to build strong retirement income accounts. We have to understand that, given the baseline, most employers are going to default to that baseline rate that's set by Congress. When Congress acts to increase the default, it is highly likely that savers will not proactively act to reduce that savings rate—which, obviously, would result in achieving the goal of increased retirement savings rates.
Byrnes: There's no need to increase the auto-enrollment default this early in the game, when we've just implemented an auto-enrollment system under the SECURE Act 2.0 in the first place. Constant rule changes are not effective in encouraging employers to adopt retirement plans—because many employers (especially small employers) feel that they can't keep up with the rules. This could lead to a situation where they simply would rather not risk running afoul of the rules by offering a retirement savings option at all.
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Bloink: While all savers are different, a good rule of thumb is that the aim should be to save roughly 10% of compensation. Starting at 3% is well below the goal we should be aiming for—increasing the default deferral rate to 6% merely brings us closer to that gold standard for savings rates. Retirement plans have become such a standard employment benefit option that increasing the default investment rate wouldn't be sufficient to discourage employers from offering the savings benefit option.
Byrnes: Yes, the point is to encourage taxpayers to save--often, this is accomplished subtly, by setting the default investment rate relatively low. While it may seem like a low baseline, with the 3% system, the point is that many taxpayers would barely notice the difference in their overall take-home pay. Eventually, the hope is that people who otherwise might not save will see a steadily growing account balance and be motivated to change to a higher deferral rate.
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Bloink: We have to remember that we're talking about a default auto-enrollment rule. Individual savers always have the opportunity to change their deferral rates or opt out of the savings program entirely. This default level is simply the baseline rate at which we're starting individual savers--not something that would be set in stone.
Byrnes: We already have a system in place where the baseline 3% default rate will be automatically increased annually, up to 10% or even 15%, under the SECURE Act 2.0. There's no reason for Congress to act to mandate a higher initial baseline default deferral rate this early in the game, when the auto-enrollment rule has only been effective for a little over a year.