How to Navigate Secure 2.0's Auto Enrollment Mandate
SECURE 2.0’s auto-enrollment rules are now in effect. See how recordkeepers and TPAs can streamline compliance with automation and payroll APIs.
The beginning of this year marked the start of SECURE Act 2.0’s automatic enrollment mandate. As of January, 401(k) and 403(b) plans created on or after Dec. 29, 2022 are required to automatically enroll eligible participants and automatically escalate their contributions annually.
Automatic enrollment has been around since 1998, when a pivotal IRS ruling clarified that automatic enrollment was permissible in 401(k) plans; but the requirement to do so is new as of 2025. This poses new challenges for recordkeepers and third-party administrators (TPAs), even if they already supported automatic enrollment for some sponsors.
The requirement to extend automatic enrollment and escalation to all new plans — coupled with the anticipated influx of millions of new participants — will make it difficult, if not impossible, for plan providers to maintain compliance through manual operations. If eligible employees are not auto-enrolled, employers could be required to make corrective contributions, which can quickly add up if the same mistake occurred for a large number of employees.
Technology and 401(k) payroll integrations, while already important for retirement savings management, are now critical to maintaining compliance with Section 101 of SECURE Act 2.0.
What is Section 101 of SECURE Act 2.0?
Section 101 of SECURE Act 2.0 mandates automatic enrollment and contribution escalation for new 401(k) and 403(b) plans that were adopted after December 2022, with enforcement beginning on January 1, 2025.
Congress’ goal in passing SECURE Act 2.0 — which also includes provisions changing eligibility requirements and establishing tax breaks for employers that offer plans for the first time — was to incentivize more Americans to save and to stave off a looming retirement crisis. In 2022, the year the legislation was passed, nearly half of American families did not hold a retirement account; but research has shown that automatic enrollment increases plan participation across the board.
SECURE 2.0 Section 101 stipulates that all employer-sponsored 401(k) and 403(b) plans adopted on or after Dec. 29, 2022 must automatically enroll eligible employees at a contribution rate of at least 3% but no more than 10%, and provide employees with the option to opt out. Section 101 also requires all participants’ contributions to be automatically increased by 1% each year until it reaches at least 10% (but no more than 15%).
Who is exempt from SECURE Act automatic enrollment?
Plans are exempt from the automatic enrollment mandate if they meet any of the following conditions:
- The plan sponsor has 10 or fewer employees
- The plan sponsor has been in business for less than 3 years
- The plan was adopted before December 29, 2022 (these plans are grandfathered in)
Industry impacts of SECURE Act 2.0
As a whole, SECURE 2.0 is expected to bring access to retirement benefits to some 19 million additional employees. The number of new participants is likely to be even higher, since many employees who have had access to a plan but haven’t taken advantage of it are likely to be automatically enrolled moving forward.
Retirement providers that focus on SMBs are likely to feel the biggest strain when it comes to automatic enrollment for two reasons:
Their operational burden is higher. Providers that serve SMBs typically manage a lot of plans with small assets, as opposed to providers focused on the enterprise who may manage billions in assets for a much smaller number of plans. As a result, SMB-focused providers have to work with dozens (or even hundreds) of different payroll systems, depending on which their sponsors use.
Most new plans subject to auto-enrollment will come from SMB sponsors. SMB employers have historically been the least likely to offer retirement plans, but SECURE Act 2.0 offers tax breaks for those setting up a plan for the first time. This means it’s likely that small businesses will make up the majority of new plans created in the wake of the legislation’s passing.
But few of these plans already have automatic enrollment in place. According to PLANSPONSOR, fewer than 1 in 4 plans with $1-5 million in assets are currently using automatic enrollment.
As more plans enter the market — and as those that were created in the last two years move to comply with SECURE 2.0 — it’s likely that SMB-focused plan providers will have the lion’s share of responsibility in ensuring these plans meet compliance standards.
Download the whitepaper: The Changing Retirement Landscape How 401(k) Recordkeepers Can Thrive Under SECURE 2.0
Auto-enrollment implications for recordkeepers and third-party administrators
Recordkeepers and TPAs will be responsible for handling a much higher volume of data thanks to automatic enrollment, both in terms of new plans and participants and increasing plan complexity.
Below, we list the key responsibilities of plan administrators under SECURE 2.0.
Participant communication
New employees need to be informed about automatic enrollment, the plan’s annual escalation, and their choice to opt out of the plan. As the provider, you’ll either need to do this on the sponsor’s behalf or ensure that the plan sponsor communicates with their employees in a timely manner.
Determining eligibility
A plan is out of compliance if an employee isn’t auto-enrolled or opted out within a window of the hire date or date of plan eligibility. You’ll need to have reliable access to the plan sponsor’s census and pay data so you can track eligible participants and make sure they meet the Section 101 requirements. The sponsor risks penalties if the employee’s eligibility window is missed for any reason.
Deductions management
While some employees may opt for the plan sponsor’s default contribution minimum, others may opt to start at a different percentage. Annual auto-escalation needs to be calculated across all attendees based on their current contribution rate at an increase of 1% per year, until they reach at least 10-15% or the plan’s maximum. These contribution changes will then need to be added to the sponsor’s payroll system as a deduction before the next payroll.
Read more: Automation in Deductions Management with Payroll APIs
Compliance monitoring
Recordkeepers and TPAs need to establish processes and protocols to make sure all plans adhere to the new requirements. While you will have gone through this process with existing plans, you’ll need to provide education to new clients who may not be familiar with SECURE 2.0 and its requirements, or to sponsors whose plans predate December 2022 but voluntarily elect to use automatic enrollment.
You may need to perform an internal audit to make sure all plans are compliant and that employee data is being managed correctly for both auto-enrollment and auto-escalation.
Training staff and preparing internal resources
In addition to educating your plan sponsors, you’ll also need to train staff. They need to understand the new processes and be able to answer questions from your clients.
You’ll also need to make sure you have enough resources available to handle increased participant support. Of course, this is less of an issue if you handle employee data through technical integrations such as APIs versus managing data manually.
Using automation to maintain compliance with SECURE Act 2.0
The more you can automate and improve operational efficiency, the easier it will be to comply with mandatory automatic enrollment while still providing great service to your plan sponsors.
Payroll integrations, like those offered by Finch, connect your plan administration software with sponsors’ payroll systems, allowing data to flow between the two automatically. Sponsors’ census and pay data is imported directly to your system and can be pulled on demand, meaning you don’t need to wait for sponsors to send their data via file or SFTP. Through this connection, you can build automation that will enroll participants when they meet eligibility requirements, increase their plan contributions annually, and even write changes from your system back to the sponsor’s payroll provider.
Automation powered by 401(k) payroll integrations will be crucial to scaling operations to match increased demand and to maintaining compliance.
“Automation is required in the current marketplace because with provisions like auto-enrollment, timing is everything.” — Brian Britt, Payroll Processing Manager at Ubiquity
1) Reliable access to employee data
Payroll integrations automatically sync data between your software and the sponsor’s payroll system, meaning you’ll have access to the most up-to-date data every time an employee is hired, reaches a threshold for 401(k) eligibility, or sees a change to their compensation. With almost immediate access to this information, you can determine participation eligibility based on the plan’s specifications and automatically send enrollment information to the employee’s email address.
This also ensures that deductions are calculated appropriately based on the employee’s gross pay and can alert you to employees that are terminated so they can be unenrolled.
2) Automate employee contributions and escalations
As the number of plan participants increases, managing contributions and escalations manually will quickly become untenable. There’s too much room for error or delays in data processing.
Bidirectional or 360° payroll integrations allow data to flow in both directions — to and from the payroll system. That means that when an employee is enrolled for the first time, changes their contribution percentage manually, or sees their contribution increase automatically as part of Section 101’s escalation rule, the change is automatically written back to the payroll system from your software. This reduces work for both your operations team and the sponsor, and ensures changes are made in time for the next payroll and in compliance with SECURE 2.0.
Retirement provider 401GO relies on Finch’s payroll API to automate payroll processing. “With an API, you’re removing so much of the overhead and complexity, and it’s consistent,” says Jared Porter, co-founder and COO. “The updates are immediate.”
4) Simplify annual reporting
Annual reporting is a key service provided by TPAs, but collecting all of the necessary data can prove challenging. With more plans, participants, and contributions to manage, this will only become more difficult.
Fortunately, payroll integrations can streamline annual reporting processes by allowing TPAs (and recordkeepers) to pull detailed year-to-date historical pay data at any time throughout the plan year. Some integrations, like those provided by Finch, also standardize the data, meaning it will always be delivered in the same format, regardless of the field naming conventions used by various payroll systems. In addition to ensuring the data is delivered in full and on time, pulling information directly from the payroll system reduces the risk of errors or typos that are common in manual operations.
Automate Section 101 compliance with Finch
As a retirement plan provider, you have the chance to take advantage of increasing plan adoption and an influx of new participants — especially if you primarily work with small business sponsors. But to capitalize on this opportunity, you’ll need to be prepared to scale operations to accommodate new business and greater plan complexity.
With Finch, you can ensure that your clients’ retirement plans are in compliance with SECURE Act 2.0 by auto-enrolling new employees, tracking opt-out requests, and calculating auto-escalating contributions. Finch’s end-to-end connectivity platform unlocks integrations with 220+ HR and payroll systems, all through a single integration.
Learn more about the benefits Finch brings to retirement plan administration by contacting our sales team.
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