How Auto Enrollment Benefits Employees and Employers

For employees, saving in a retirement plan can be a win. It can be for the employer who runs the plan, too. And when the plan offers automatic enrollment, it can have even more short- and long-term upsides for both individual workers and their company. Let’s explore why auto enrollment may be a win-win.

Automatic enrollment (or auto enroll) is a retirement plan feature that allows employers to take a portion of a worker’s pre-tax wages and contribute it to the plan. Contributions usually start shortly after the employee becomes eligible—unless they actively opt out.

Why does auto enroll help people save for retirement? Psychology suggests they find it harder to opt out than they do to opt in. If employees are automatically enrolled, they are more likely to save in the plan than if they had to actively choose to participate.

Auto enrollment may seem like just another optional retirement account feature. But it’s a benefit that can have a positive impact on both the employee and the employer.

Benefits of Auto Enrollment for Employees

Saving for retirement is a priority for many employees. Getting auto enrollment from an employer may sweeten the deal. Here are some of the benefits that an employee may have:

Reduces stress.

Auto enrollment can decrease questions over how much to contribute. When new employees start at a company, they may feel bombarded by paperwork and procedures. Having a portion of their pre-tax wages contributed automatically may lessen that stress. Of course, the employees know they may choose to opt out or increase their contributions at any time. They can have as much control as they want.

Vests immediately.

Unlike employer contributions, auto enrollment funds are always vested in the employee’s account right away. Vesting gives you complete ownership of the money from the start—and you can take the amount with you if you leave the job.

Jumpstarts savings.

With auto enrollment, employees are less likely to opt out. That can give them an opportunity to work on reaching their retirement goals without even noticing.

Aids accumulation.

Employees could potentially see their retirement account build up quicker because the contribution is pre-tax and the savings potential growth would be tax deferred. That, in turn, may motivate them to save more for an optimal retirement.

Benefits of Auto Enrollment for Employers

Employees may see some positives in auto enrollment retirement plans. But the benefits don’t stop there. This feature serves the company offering it, too. Generally, for the employer, auto-enrollment does the following:

Attracts and keeps employees.

As a part of a larger benefits package, an employer-sponsored retirement plan can help draw in and retain talent.

Streamlines plan enrollment.

Every employee is auto enrolled in the plan. That simplifies the administrative work needed to onboard employees.

Strengthens employee financial security.

Since employees are automatically saving for retirement, they may feel less financial stress about the future. Additionally, some plans also offer automatic escalation. That means the contribution gets a bit bigger over time—usually increasing by a percentage or two up to a certain amount. That gradual increase can help employees save more and more each year, without much difference to their take-home pay.

Increases participation.

Employers may offer additional tools or services to employees because there is more buy-in to the retirement plan. Fund managers may offer more features for the employer and the employee with a larger fund to manage.

Reduces employer tax burden.

Employers can enjoy tax advantages, including an employer tax credit and auto enrollment tax credit. Depending on the organization’s size, eligible employers may claim a tax credit of $5,000 for three years  . Similarly, eligible employers may receive a $500 tax credit  for three years, starting the year auto enrollment is added to the plan.

Auto Enrollment Can be a Win-Win Benefit

The number of auto enroll plans has steadily risen.² It’s easy to understand why. Employees can jump right in to their retirement plan. Employers get an easier way to onboard and administer the plan. Some companies can also receive additional benefits in the form of employer tax credits.