Automatic enrollment: what changes when employees are enrolled by default

Plans that enroll employees automatically report far higher participation than plans that wait for a signup. Here is how automatic enrollment works, who is required to have it, and what it costs.

85% versus 41%. That is 401(k) participation in plans that enroll employees automatically versus plans that wait for a signup, according to T. Rowe Price's Reference Point 2025, which uses 2024 data from plans T. Rowe Price keeps records for.

Vanguard sees a similar gap among small plans, those with up to $50 million in assets: 82% versus 52% in 2024 (How America Saves 2025: Small Business Edition). Your plan's numbers will differ. The direction of the gap is the useful part.

Why the default matters

In a voluntary plan, an employee has to find the form, pick a contribution rate, pick a fund, and turn it in. Plenty of people mean to and do not.

In an automatic plan they are in from the start at a set rate, in a default investment the plan has chosen. They can change the rate, change the investment, or opt out at any time.

Nothing about the plan's benefits is different. The only change is what happens when an employee does nothing.

How automatic enrollment works

A plan with automatic enrollment sets four things:

1. The default rate. The percentage of pay withheld if the employee makes no election.
2. Automatic increases. Whether the rate steps up each year, and where it stops.
3. The default investment. Where contributions go if the employee does not choose. Many plans use a target date fund for this.
4. The notice. Employees are told in advance what will happen and how to change it or opt out.

A plan can also let an employee who was enrolled by default take those first contributions back out, generally within 90 days of the first one. Plans that are required to have automatic enrollment must offer this.

Who is required to have it

Under SECURE 2.0, Section 101, most 401(k) plans established after December 29, 2022 have to include automatic enrollment for plan years beginning after December 31, 2024. There are exceptions for small and new businesses.

For plans covered by the rule, the default rate starts between 3% and 10% of pay and increases 1% a year until it reaches at least 10%, and no more than 15%. The exceptions include employers that normally have 10 or fewer employees, businesses less than three years old, and church and governmental plans.

Older plans are not required to add it. They can choose to.

What it costs

Automatic enrollment is not free for the employer, and it is worth being clear about that before adopting it.

• More matching dollars. If the plan has a match, more participants means a larger match cost. This is usually the biggest number.
• More small accounts. Short-tenure employees leave behind small balances that the plan has to track and eventually move out.
• Payroll has to get it right. A missed enrollment is an error the employer has to correct.
• A few surprised employees. Some people do not read the notice and are caught off guard by their first paycheck. A clear notice ahead of time, and a mention at hiring, helps.

If your plan is not required to add it

For an older plan, this is a design choice. A few things an employer usually works through:

• Apply it to new hires only, or also to current employees who are not contributing?
• What default rate fits the workforce? A low rate keeps opt-outs down but may leave people saving less than they would have chosen.
• What would the match cost at higher participation? Your administrator can estimate it.
• Is payroll set up to handle it?

Where to start

Find your plan's participation rate. Your recordkeeper reports it, and it is usually on the annual plan review.

If participation is lower than you want, the default is the first thing I would look at, before the match and before another round of meetings.

If you would like to look at your plan's number together, request a plan review.

Sources: T. Rowe Price, Reference Point 2025 (2024 data); Vanguard, How America Saves 2025: Small Business Edition (2024 data); SECURE 2.0 Act of 2022, Section 101; Internal Revenue Code Sections 414A and 414(w).