Auto enrollment can provide a lot of benefits to employers and employees, yet it doesn't quite get the credit it deserves. How auto enrollment works is fairly straightforward: when employees become eligible to join your 401(k) plan, they are automatically enrolled. But there is a common misconception that it forces employees to participate in the company 401(k).
Rather, all eligible employees can choose to opt out of the plan (and then opt in later if they choose). If an eligible employee takes no action before the stated deadline, they will be automatically enrolled at a pre-determined contribution rate. If they want to opt out, they can do so at any time.
What auto enrollment helps combat is participant inertia. Investment portfolios, target date funds, expense ratios, contribution rates—these are all terms that can be confusing and cause inaction. Auto enrollment can take indecisiveness and procrastination out of the picture.
On auto enrollment plans, employers choose a default contribution rate and a default investment portfolio for people who do not make the selections themselves.
But before we get into the additional benefits of auto enrollment, let's take a look at the numbers.
An analysis of industry auto enrollment plans
401(k) plans are one of the most popular workplace benefits, second only to health insurance. Yet participation is far from guaranteed, and the difference in enrollment between voluntary and automatic plans is stark — plans with auto-enrollment have a 94% participation rate compared to 64% for voluntary enrollment plans, and are nearly twice as likely to have participation rates of 80% or higher.
That gap comes down to inertia. When employees have to opt in, many simply never get around to it — even if they intend to. Auto-enrollment flips the default: employees are enrolled automatically and must actively choose to opt out. The result is that more employees start saving sooner, with less friction. In fact, 65% of employees now expect auto-enrollment as a feature when starting a new job.
By defaulting your employees into your 401(k) plan with an auto-enroll feature, you can increase participation rates and help employees reach their savings goals — with minimal effort on their part.
Auto-enrollment benefits the employees who need it most
Automatic enrollment doesn't just benefit those who can already afford to save — it has an outsized impact on workers who might otherwise never start. Gusto's own research on state auto-IRA policies found that auto-enroll programs increase average savings rates by 55% for earners at or below the median income, with the average worker at or below median income increasing their retirement savings rate from 2.2% to 3.4%.1
And the effect is lasting for such state auto-IRAs — prior to implementation of an automatic enrollment program, workers had a 50% chance of participating in a retirement savings account; by the first month after the policy was introduced, that probability increased to 60% and stayed there, suggesting that enrollment due to auto-IRA policies drives real, long-term behavior change.
The long-term payoff is significant
Getting employees enrolled earlier means more time to benefit from compounding returns.2 Research from the Employee Benefit Research Institute (EBRI) found that for workers with 27–30 years of future eligibility in a retirement plan, the retirement savings shortfall decreases by 60% when automatic enrollment, auto-escalation, and auto-portability are all in place. EBRI also found that the combination of automatic enrollment and escalation increased the proportion of Americans projected not to run out of money in retirement — with the greatest gains for the youngest workers.
Auto-enrollment is becoming the standard
Auto-enrollment isn't just a best practice — it's increasingly the law. Under SECURE 2.0, 401(k) plans established after December 29, 2022, for plan years beginning after 2024, are generally required to include automatic enrollment, with a default contribution of at least 3% and automatic escalation of 1% per year up to at least 10%. For employers setting up a new plan, auto-enrollment is no longer optional — and for those with existing plans, it sets a clear benchmark for what employees are coming to expect.
Disclosures
¹ The experience of the respondents in this survey may not be representative of all people.
2 This information is for illustrative purposes only and does not represent the actual return you would accrue. Information shown here does not account for common factors that affect the value of your account balance over time such as gains, losses, distributions, additional contributions, etc., and is not intended to constitute investment advice nor an assurance or guarantee of future performance. Investing involves risk and investments may lose value, including loss of principal.
