Putting a chunk away for retirement in 2025 – perhaps it was a New Year’s resolution, or, more likely, it’s simply a goal you have every year. In either case, now that we’re more than halfway through 2025, how are you feeling about reaching that goal?
Being as it is that life rarely follows a predictable pattern year over year, it’s common that one may fall behind in their retirement savings plan over the course of a year or a few. This means in order to stay on track with your retirement planning goals, you’d need to have a period of a year or a few to catch back up, to compensate for.
Whether this year is one where you may fall behind or one in which you have the means to catch up from a “behind year” in the recent past, there are a few important changes to be aware of in the year 2025.
Depending on your financial and/or employment situation along with your age, being aware of the opportunities presented by these changes potentially puts you in a better position to retire earlier, retire more comfortably, or leave a larger legacy behind for your loved ones – whatever your individual goals may be.
So over the next few weeks, we’ll take a look at three important changes stemming from the SECURE 2.0 act, enacted Dec. 29, 2022. We’ll look at each change one at a time, detailing how they work so you can gain clarity, more so than reading the often convoluted official IRS release (stimulating as that may be). Finally, we’ll consider who could benefit from incorporating one, two, or even each of them into their retirement savings strategy.
Let’s start with the new auto-enrollment feature for recently established retirement plans.
Retirement Plan Auto-Enrollment
One of the fundamental goals of the SECURE 2.0 act is to encourage more people to save more with a view to retirement. One of the ways the act accomplishes this is through a new regulation requiring newly established employer-sponsored retirement plans – like 401(k)s & 403(b)s – to auto-enroll employees. The official name given to this regulation is the eligible automatic contribution arrangement (EACA).
Each qualified employee has the ability to opt out. If they don’t, they’ll be enrolled (thus, “automatic” enrollment).
How It Works
- If a qualified employer sets up a new 401(k) or 403(b) plan, then all employees who qualify for enrollment will be automatically enrolled in the plan.
- For employees automatically enrolled, their year 1 default contribution rate (that is, the percentage of their pre-tax paycheck that will be allocated) is 3%.
- There is a 1% mandatory annual escalation to the default contribution. That is, for employees who’ve been auto-enrolled in the plan with the default 3% contribution rate, that contribution rate will increase by 1% each year up to at least 10% but not more than 15%.
Here’s a quick example of how that might work over the course of an individual’s employment:
- Year 1: Employee doesn’t opt out and therefore is auto enrolled at the default contribution rate, 3% of their pay.
- Year 2: Employee hasn’t set a custom contribution percentage, so their deferral automatically increases to 4%.
- Year 5: The same pattern continues and so the employee’s salary deferral into their retirement plan increases to 7%.
- Year 8: Contribution increases to 10% of employee’s pay (this is the minimum a plan may set for automatic contribution increases).
- Year 13: Let’s assume the 401(k) or 403(b) plan is set up so that instead of the minimum automatic contribution increase limit of 10%, it goes to the maximum limit of 15%. In that case, if the above pattern continues, the employee’s contribution increases to 15% in year 13 of their employment. It will remain at that rate until the employee sets a custom percentage.
Here’s an important note for clarity: employees who are auto-enrolled don’t need to automatically make the 3% contribution. Each employee can choose a different contribution percentage.
Remember these contributions are pre-tax – that is, they lower your taxable income, up to established limits. Speaking of those established limits, that’ll be key to Part II of the retirement plan changes we’re discussing, so be sure to catch that next week.
Exemptions – Who Aren’t Included?
401(k) or 403(b) Plans Established Before Dec. 29, 2022
The auto-enrollment feature of this act applies only to plans that were established on or after the enactment date of the SECURE 2.0 act.
Small Businesses
Employers with 10 or fewer employees are allowed an exemption from the above-stated auto enrollment requirement.
Let’s look at a simple example for clarity, using the fictional company Smith & Co. Snow Shovels & Snow Blowers, LLC (sorry to remind about the inevitable for our northern readers), which was incorporated in 2023.
- This company has 8 employees.
- Last year, in 2024, they set up the Smith & Co. Snow Shovels & Snow Blowers 401(k) Plan as an incentive to their employees.
Although the plan was established after the auto-enrollment regulation was enacted (Dec. 29, 2022), since they have 10 or fewer employees, they are exempted from the EACA.
Here’s an important note: Although this company’s 401(k) plan isn’t mandated to offer auto-enrollment nor the automatic annual escalation for employee contributions, they still can choose to set these features up within the plan.
Let’s say this company brought on 6 more employees in 2025 and now employed more than 10 individuals. What then? In that case, they will have to restructure the 401(k) plan so as to offer the auto-enrollment feature, if they didn’t already have it. However, they won’t have to do this right away. Why not? That brings us to the next exemption.
New Businesses
Another exemption to the EACA is held out for newer businesses. Businesses that qualify for this exemption related to their employer sponsored plans are ones that have been in existence for less than 3 years.
Again, let’s take a look at a simple example to put this into practice. We’ll use our fictional company above to help us.
- We already know they set up the Smith & Co. Snow Shovels & Snow Blowers 401(k) Plan in 2024, which is after SECURE 2.0 was enacted.
- We also stated that now, in 2025, they brought on 6 more employees, bringing the total to 14. This means the small business exemption under this law no longer applies to them.
- However, we did state that the company was incorporated in 2023. Therefore, since this company has only been in operation for two years in 2025, it is exempted from the auto-enrollment regulations detailed above.
What happens next year when the company reaches its 3 year mark (assuming it keeps more than 10 employees)? Then it will have to restructure its 401(k) plan to offer auto-enrollment since neither this nor any of the other exemptions would apply any longer.
How You Can Benefit
Do you work for a company that has only been in existence for a couple of years or less? If so and you haven’t stayed on top of your retirement plan opportunities there, it may be worth taking a bit of time to see if you’ve been auto-enrolled and already have some retirement funds being saved up for you through your employer. If that is the case, it would be worthwhile to take a look at what your current contribution percentage is.
And, as always, you should take advantage of employer matching to the extent possible. If you are new to an employer plan that offers auto-enrollment, it may be that the max employer matching percentage is more than you’re currently contributing. In that case, you may well consider increasing your contribution rate from the automatic contribution rate so you can hit that max matching percentage.
As in the case of all retirement plans, whether they fall under the SECURE 2.0 act or not, a periodic review of your retirement savings strategy is always beneficial. Doing so will help you find out if you’re on track to meet your retirement goals or if some changes are in order.
Of great help when doing a periodic review of your retirement savings strategy is through the use of these Financial Planning Tools:
- Investment Risk Questionnaire
- Investment Calculator
- Budget Worksheet
- Life Insurance Calculator
If you’d like a full-scale review of your retirement plan that includes tax minimization, Social Security maximization, and Estate Planning guidance – especially if retirement isn’t many years away, book a no-obligation chat with a retirement plan design professional to find out what your next steps should be.
Retirement Plan Account Change Part II – What’s Next?
Next week we’ll be considering how the SECURE 2.0 act includes a new regulation that bolsters the catch-up contribution feature of retirement account saving limits for savers who are getting close to retirement.
If you’d like a refresher on what catch-up contributions are and how they work, take a look at our article, Catch-up Contributions – a Provision to Supercharge Age 50+ers Retirement Plan.
Also read, Are You Leaving Money on the Table by Claiming Social Security Too Soon?
Let’s Have a Conversation:
If you are retired, how do 401K savings help your income? If you still have a few years until retirement, what are you contributing to your 401k or 403b plans?
