401(k) auto-enrolment in the USA

If you’re running a business in the USA and you’re not familiar with the SECURE 2.0 auto-enrolment mandate, now’s a good time to learn.

Auto-enrolment is being introduced in the USA from 1 January 2025 for all new 401(k) plans established after the passing of SECURE 2.0 (December 29, 2022).

Auto-enrolment is being rolled out to address the challenge of insufficient retirement savings by automatically enrolling eligible employees into employer-sponsored retirement plans, unless the employee actively opts out.

The strategy of auto-enrolment aims to encourage higher participation rates and increase retirement readiness, and is already in place in a number of countries including the UK, Australia and Poland.

We’ve prepared this guide to help you prepare for the new legislation and to help you stayr compliant when the new law comes in on 1 January 2025.

The need for auto-enrolment in the USA

The retirement savings gap in the USA is a growing concern.

A 2024 survey from the National Institute on Retirement Security found that 79% of working-age Americans believe the country “faces a retirement crisis,” up from 67% in 2020.

To support this, Schroders 2023 U.S. Retirement Survey found that non-retired Americans between the ages 43 and 58 say on average it will take USD 1,112,183 in savings to retire comfortably, yet they expect to have just USD 661,013 saved.

Auto-enrolment addresses these issues by removing the need for employees to take proactive steps to enroll. By defaulting your employees into a savings plan, you help overcome common psychological and logistical barriers to participation.

What is the SECURE 2.0 Act & why was it passed?

Auto-enrolment gained traction following the US Pension Protection Act of 2006, which provided a legal framework and incentives for businesses to adopt the feature. The law encouraged the use of default options like target-date funds and automatic contribution escalation.

The Pension Protection Act defines two different choices for employers seeking to add an automatic contribution arrangement:

Eligible Automatic Contribution Arrangement (EACA).

Under an Eligible Automatic Contribution Arrangement (EACA), employers set a default contribution percentage for all employees, which applies automatically after employees have been given the required notice.

Your employees will also have the option to withdraw their automatic contributions, along with any earnings, by submitting a request. All contributions under an EACA are fully vested, meaning employees immediately own any employer contributions made to their 401(k) accounts.

Qualified Automatic Contribution Arrangement (QACA)

QACAs provide employers with safe harbor provisions that exempt them from testing requirements under specific circumstances. Other plans must undergo such testing to ensure they do not discriminate against lower-paid employees.

In return, employers must make matching contributions as required by the IRS and must vest matching and non-elective contributions within two years. The default deferred contribution for a QACA must also increase annually from at least 3% the first year to at least 6%, with a maximum of 15% in any year.

In December 2022 Secure 2.0 introduced new provisions to make auto-enrolment even more widespread. This impacts businesses with 401(k) plans that were established after the enactment of SECURE 2.0 (29 December 2022).

Some businesses will be exempt from this mandate, including:

Those who do not normally employ more than 10 employees
Businesses that established a workplace retirement plan before 29 December 2022
Been in operation for less than three years
SIMPLE 401(k) plans, governmental and church plans

The new SECURE 2.0 auto-enrolment requirements

If you have a 401(k) plan which has been set-up since 29 December 2022 you should comply with the new requirements as follows:

Mandatory auto-enrolment of employees

From 1 January 2025, all 401(k) plans set-up since December 2022 must include auto-enrolment for eligible employees. Eligible employees are defined as:

Aged at least 21 years old.
Completed at least 1 year of service, defined as working at least 1,000 hours in a 12-month period.

Certain categories of employees can be excluded, such as:

Unionised employees if retirement benefits are covered under a collective bargaining agreement.
Part-time workers who do not meet the service requirement.

Although there is a requirement to automatically enroll, your employees can opt out of the retirement plan.

Minimum employee contribution rates

You will have to select a minimum contribution rate for their employees to contribute. The minimum required employee contribution rate is 3% with a cap of 10%.

It is important to note there is currently no legal requirement for your business to make a contribution; however, this is very much expected as part of a competitive retirement offering in the USA.

Automatic escalation of employee contribution rates

As part of the provision, these retirement plans must include an automatic escalation rate of 1% each year until the predetermined maximum rate of 10% to 15% is reached. The 1% annual rate is not required if the initial maximum contribution rate is 10% or more.

Employer communications

You must notify employees about the plan details, including contribution rates, investment options and opt-out provisions.

Opt out process

As mentioned, your employees can elect to opt out of the 401(k). You must have a process in place to accommodate any opt out requests.

SECURE 2.0: the next steps for you as an employer

Choose the right plan type

You can choose from different 401(k) plans. See our What is a 401(k) guide for the options available, this includes further details on the QACA plan which has the automatic enrolment feature built-in

Select a plan provider

Partnering with a reputable financial institution or plan administrator is essential. Providers can manage your plan setup, help you ensure compliance, and navigate investment options on your behalf.

Determine contributions

This is a key decision for you to make for your 401(k) strategy. As we discussed earlier, there are mandatory employee contribution requirements to comply with the auto-enrolment rules.

There is no mandatory requirement for you as an employer to provide a contribution; but you may wish to consider whether it would be an affordable option which could benefit you in the long-term with recruitment and retention.

Communicate with employees

There is a mandatory requirement for you to provide your employees with:

Plan details (eligibility, benefits, opt-out process, etc.).
Information about default investments and fees.
A clear opt-out form or process.

Set up payroll integration

Work with your payroll provider to ensure contributions are deducted and deposited accurately. Automate processes to adjust contributions for employees who opt-in, opt-out, or change their deferral rates.

If you have an existing 401(k):

Review plan documents

It is important for you to ensure your existing 401(k) documents meet the SECURE 2.0 requirements. The retirement plan provider will be able to provide confirmation and support here.

Update contribution features

As detailed in our guide, there are minimum default contribution rates, and escalation of contributions required on an annual basis. You should check with the retirement plan provider that these features are in place from 1 January 2025 to ensure smooth processing.

Set up notices

We’ve mentioned above the requirement to send mandatory communications to employees. These notices need to be sent 30-90 days before the start of the plan year.

Auto-enrolment is more than a plan feature for businesses. It is a commitment to your workforce's future.

For your employees, it’s a powerful tool to build wealth and prepare for a comfortable retirement. As legislation like Secure 2.0 encourages broader adoption, auto-enrolment is poised to play an even greater role in shaping the financial well-being of millions of Americans.

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