How auto-enrollment and auto-escalation have set the stage for the automatic 401(k)

When the 401(k) plan got underway in the early 1980s, it was never meant to be the only solution for retirement savings. It started as a minor section of the tax code for employer-matched savings and was intended to complement Social Security and pension benefits. Today, defined-benefit pension plans are becoming a relic in the private sector, which means more and more workers must rely on just their 401(k) plan to save for retirement.

Over the last decade, a series of policy changes have expanded access to 401(k) plans, and the number of people participating in a 401(k) grew 19% between 2019 and 2023. However, those efforts are still falling short of helping tens of millions of Americans avert a retirement crisis.

Almost half of the U.S. workforce lacks access to a retirement plan through their employer, and many smaller businesses have yet to offer one. This is partially due to the misperception that these benefits are always expensive and complex to manage for companies. Even when offered, 41% of full and part-time workers are not using them, according to a recent CNBC survey. Reasons cited include lacking enough income to save, inflation, and rising interest rates.

Making 401(k) plans more automated could solve many problems that burden the current system, help more people get enrolled, and help more people save for their future. Let’s dig into what making 401(k) plans automatic means and why that inflection point could come in 2025.

How automatic enrollment has already helped retirement

Extensive research has shown that auto-enrollment in a retirement plan — rather than asking people to sign up themselves — has a substantial impact on the number of employees who participate. In states such as California and Oregon, where it’s already a requirement to automatically enroll workers in a retirement savings plan, auto-enrollment has successfully brought retirement savings to more women, younger people, and people of color.

Another way 401(k) plans are helping people build savings is through auto-escalation, or automatically increasing the percentage that goes into savings up to a limit. Many plans today with auto-enrollment set a default pre-tax savings rate of 6%; for plans with auto-escalation, participants are bumped up 1% every year with a cap as high as 15%. Plan participants can personalize their contribution rates if they choose, but they are enrolled at the default rate if they don’t.

Under the SECURE 2.0 legislation from 2022, policymakers codified auto-enrollment and auto-escalation into national law. In 2025, both auto-enrollment and auto-escalation will be required for most new 401(k) plans created in 2023 and onward.

For businesses offering 401(k) plans, auto-enrollment and auto-escalation could drive broader use and greater savings rates within their employee base and reduce their risks of failing nondiscrimination tests.

Could automatic features expand in 2025 and beyond?

Next year, there will likely be more movement around retirement legislation as the Trump tax cuts (i.e., the 2017 Tax Cuts & Jobs Act) are set to expire at the end of 2025. This, coupled with the shortfall in Social Security funding looming over the next decade, could create an opening for expanding the SECURE 2.0 measures on automatic enrollment and escalation.

Future retirement legislation, potentially SECURE 3.0, could require auto-enrollment and auto-escalation in most 401(k) plans, including those started before 2023. These older plans could be required to phase in auto-enrollment for workers and also include auto-escalation by a certain date (e.g., by the end of 2027).

In addition to extending the auto-enrollment and auto-escalation requirements to pre-2023 plans, we could also see provisions requiring auto-reenrollment and required baseline auto-contribution from employers. If reenrollment is enacted, it could be applied as frequently as annually, where workers who had opted out in prior years would be auto-enrolled again every year (and could opt out again if they choose).

For auto-contributions, employers could be required to contribute 3-4% of an employee’s pay if they want to have plan access to the annual maximum employer contribution limits (i.e. $23,000 for 2024) for their higher-paid employees. Today, employers get a tax deduction for employer contributions, which means that a required employer match also comes with embedded tax benefits to the business.

While a required employer contribution may be hard to envision at scale in the U.S., there are precedents in other countries’ retirement systems for this. In Australia, under the Superannuation Guarantee, employers currently contribute 11% of their worker’s pay. That high percentage is unlikely to happen with American companies any time soon, but a smaller minimum required employer contribution could be something to watch out for in the coming year — paired with tax benefits for companies.

The savings crisis in the U.S. will take effort to turn around. Next year, lawmakers have an opportunity to further expand access to 401(k) plans and pathways to retirement savings for tens of millions of workers — by making saving even more automatic.