Fiduciary News

The idea of 401k auto-enrollment may be one of the greatest innovations in retirement plan history—or one of its greatest illusions. Few plan design features have done more to increase participation. Yet participation and retirement readiness are not synonymous, and confusing the two may create what can only be described as the Auto-Enrollment Paradox.

The plan committee naturally measures participation. The participant measures retirement readiness. Those are not necessarily the same thing.

A retirement plan can proudly report that record numbers of employees are participating while many of those same employees remain on a path that leaves them financially unprepared for retirement. Auto-enrollment solved one longstanding problem by overcoming inertia. It did not necessarily solve the equally important question of whether participants are saving enough.

That distinction matters because ERISA does not ask fiduciaries to produce retirement-ready employees. Fiduciaries are responsible for prudently administering the plan in accordance with its terms and applicable law. Individual employees ultimately remain responsible for deciding whether to participate, how much to contribute, and whether to remain on track for retirement. Even so, prudent fiduciaries periodically evaluate whether their plan design continues to serve participants as intended.

That makes auto-enrollment less of a finish line than a starting point.

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The 401k Auto-Enrollment Paradox Begins With Good Intentions

Automatic enrollment represented a significant behavioral breakthrough because, thanks to the 2006 PPA, it changed the default. Rather than requiring employees to complete paperwork before they could begin saving, employees entered the plan automatically unless they actively chose not to participate.

Participation rates climbed almost immediately after employers adopted automatic enrollment. From a governance perspective, that appeared to be a tremendous success.

But behavioral economics cuts both ways.

Employees often interpret defaults as recommendations. Many assume the default contribution rate must be sufficient. If annual automatic escalation increases contributions only in small increments, workers may spend years slowly climbing toward more meaningful savings levels. Younger employees may leave for another employer before ever reaching those higher contribution rates.

“Too often, auto enrollment is limited to new hires, and starts with a small percentage of pay, say 3%, says Jack Towarnicky, Of Counsel, Koehler Fitzgerald, LLC in Powell, Ohio. “And, few use auto-escalation to prompt individuals to start contributions once they have declined to participate. Limiting auto-escalation to 1% or 2% a year moves the needle slowly—and is often disrupted by turnover among younger, shorter-service, lower-paid workers. The better option is to perennially backsweep individuals who are contributing less than the amount necessary to obtain the full employer financial support. When folks ask ‘just how many times must I tell you that I don’t want to participate in this plan,’ your simple response should be: ‘Just once a year.’ We adopted that backsweep process when rolling out auto features in 2006, announcing a 5-year implementation period – where we notified workers that they would be auto-enrolled or auto-escalated each year until their annual addition was 15% of pay.”

The challenge extends beyond contribution rates. Automatic enrollment remains voluntary because employees retain the right to opt out altogether. Others simply cannot afford to contribute enough to make meaningful progress toward retirement.

“So long as employees have the opportunity to opt out of an arrangement and there is no likelihood that such feature of the law will change, nonparticipation by a certain segment of the workforce will continue and must be acknowledged by plan sponsors,” says Marcia S. Wagner of The Wagner Law Group in Boston, Massachusetts. “Auto-escalation in addition to automatic enrollment would be a partial fix, but employees could here too opt out of this feature. Employees who are disinterested or who are unable to contribute at all or to contribute at a meaningful level will continue to do so.”

Auto-enrollment was designed to encourage employees to begin saving. It was never designed to guarantee they would save enough. Recognizing that distinction lies at the heart of the Auto-Enrollment Paradox.

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Why Some Plans Face a Bigger Challenge Than Others

The governance questions surrounding automatic enrollment are not identical for every retirement plan.

Many larger, well-established plans adopted automatic enrollment years after the plan itself was created. As a result, they often have two very different participant populations. Newer employees entered under automatic enrollment. Longer-service employees may have never been automatically enrolled or automatically escalated because they were effectively grandfathered under the previous plan design.

That creates an uneven landscape in which employees performing similar jobs may be subject to very different savings mechanisms simply because they were hired at different times.

“The existing workforce should not be grandfathered, so auto-enrollment and auto escalation should be extended to the entire workforce,” says Wagner

Smaller or newer plans may not face this issue to the same degree. If nearly every employee joined after automatic enrollment was already in place, there may be little distinction between legacy and newer participants. Those fiduciaries may instead focus on whether their default contribution rates, escalation provisions, and overall plan design continue to encourage appropriate savings behavior.

Recent legislation has also prompted many plan committees to revisit these questions.

“While the SECURE 2.0 Act made auto-enrollment at a salary deferral percentage between 3 and 10 percent, with an annual increase up to a maximum amount salary deferral percentage between 10 and 15 percent, a requirement for most new 401k and 403b plans established on and after December 29, 2022 (with exceptions for small and new businesses, church and governmental plans), these design features could be useful for even pre-enactment plans in order to provide participants with a guided way to save more for retirement,” says Michelle Capezza, Special Counsel at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. in New York City. “When proposed regulations were issued in January 2025, plan sponsors sought to confirm whether their plans, and their various scenarios, met the requirements to be grandfathered from these rules, and final regulations are anticipated this year which will enable plan sponsors to confirm the answers to their questions. Yet, it might be worthwhile to make prospective plan amendments to adopt these new requirements even for pre-enactment plans. Plan sponsors could take the time now to evaluate their current plan designs and ways to improve them for 2027 and beyond in the best interests of the plan participants.”

The Auto-Enrollment Paradox becomes especially evident when committees realize that increasing participation and improving retirement readiness are related objectives—but they are not identical ones. One naturally follows from plan design. The other ultimately depends on the choices participants make throughout their working careers.

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What Should Fiduciaries Do?

It is important not to overstate the fiduciary obligation.

ERISA does not require fiduciaries to ensure participants retire with adequate savings. Nor does it require them to prevent employees from opting out of automatic enrollment or declining automatic escalation. Retirement readiness ultimately belongs to the individual employee.

That does not mean fiduciaries should ignore plan design.

Prudent governance includes periodically reviewing whether automatic enrollment provisions, default contribution percentages, automatic escalation schedules, and legacy plan provisions continue to reflect the committee’s objectives for the plan and operate in accordance with the plan document and ERISA. Such reviews become especially appropriate after significant legislative changes, evolving industry practices, or major workforce changes.

“Plan sponsors may want to ensure that their workforce is on a realistic path to retirement security, whether or not such goal is fiduciary in nature,” says Wagner. “They need to be open to exploring a variety of approaches, to make an assessment of which might be appropriate for their workforce.”

A desire to improve participants’ retirement outcomes may be good plan governance even when it extends beyond ERISA’s fiduciary requirements.

The Auto-Enrollment Paradox reminds fiduciaries that participation is only the beginning of the retirement journey. Employees—not fiduciaries—remain responsible for achieving retirement readiness. Fiduciaries, however, should periodically ask whether the plan’s automatic features continue to provide participants with a prudent opportunity to make that responsibility easier to fulfill.

Participation is easy to measure. Retirement readiness is much harder.

That’s why the most important question may not be whether your plan’s 401k auto-enrollment increased participation. It may be whether your plan’s auto-enrollment success story is complete.Top of Form

In the end, it’s something only your employees will know for sure.

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Christopher Carosa is an award-winning online news producer and journalist. A dynamic speaker, he’s the author of  401(k) Fiduciary Solutions, Hey! What’s My Number? How to Improve the Odds You Will Retire in Comfort, From Cradle to Retirement: The Child IRA, and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on X, Facebook, and LinkedIn.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, Mid-Atlantic, and Midwestern regions of the United States and in the Toronto region of Canada