SECURE 2.0’s auto-enrollment: Driving participation in nonprofit 403(b) retirement plans
Nonprofit organizations, such as hospitals, public schools and universities, are expanding eligibility to participate in their 403(b) plans, adding automatic enrollment (now mandatory in 2025), and adopting optional provisions of SECURE 2.0 to provide further flexibility to participants, according to the Plan Sponsor Council of America’s (PSCA’s) 2024 403(b) Plan Survey.
“The addition of auto enrollment in employer plans is perhaps the most significant driver in the increase of participation among nonprofit employees,” said Chris Conway, executive vice president and chief revenue officer at Mutual of America Financial Group. “It’s encouraging to see that more than a third of 403(b) plans offered auto enrollment in 2023, compared to just 19% 10 years ago.
“It’s also good news that participants are saving, but a default deferral rate of 3% or less in about 70% of plans will not lead to retirement readiness, so the addition of features such as auto-escalation will help boost participation rates as well as deferral rates. Other notable design features nonprofits are adding or adopting include an employer match with immediate eligibility, Roth options, SECURE Act provisions and re-enrollment opportunities.”
The PSCA survey, sponsored by Mutual of America Financial Group, reports plan design information from 323 nonprofit organizations that sponsor 403(b) plans for employees.
While nonprofits are adding plan design features to encourage participation and savings rates, there is still a need to better educate plan participants about the options that are available to them. Fewer than a quarter of plans are providing holistic financial wellness programs, and only a third provide one-on-one counseling with a financial advisor.
The survey reveals that 90% of all nonprofit employees are eligible to participate in plans, a survey high, and likely expanded due to SECURE 2.0 provisions allowing long-term part-time (LTPT) employees to participate. “Certainly the LTPT eligibility rules in SECURE could be increasing the number of part-time employees eligible to participate (though because of universal eligibility in 403(b) plans, this provision may be having less of an impact than in 401(k) plans that do not have such a rule),” said Hattie Greenan, PSCA’s director of research and communications.
Plan participation rates remained strong in 2023, along with a slight increase in use of plan loans and hardships. “About 85% of our clients are nonprofits and these employers recognize how critical it is to provide benefits such as a 403(b) plan to attract and retain talent in an increasingly competitive environment,” said Conway. “Given this, we’re seeing – and the PSCA survey further bears out – an increased emphasis by employers to add features like auto enrollment, offer investment options like target-date funds, and enhance financial education opportunities, to support strong participation rates.
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“For employees, we’ve found the correlation between education and participation powerful, especially as they learn how saving and accumulating assets can help them achieve the retirement outcome they want.”
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“We know that education is key to better participant outcomes, yet fewer than 20% of organizations offer a comprehensive financial wellness program,” said Greenan. “Education is often done once a year at open enrollment but providing ongoing, consistent messaging with multiple touchpoints throughout the year will increase engagement with education programs.
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“Partnering with a plan provider or advisor who can provide regular education events and one-on-one support for participants, or taking advantage of participant education resources, webinars and seminars provided by many recordkeepers, are great ways to boost financial literacy of employees. Additionally, taking advantage of “holidays” such as 401(k) day, America Saves Week, HSA Day, etc. are also great ways to host fun educational events throughout the year to create engagement with financial education programs.”
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The data also shows that nearly 70% of respondents added the optional provision in SECURE 2.0 to allow for a distribution in the event of a natural disaster, 60% added the provision for terminal illness, and 48.4% adopted the $1,000 emergency withdrawal provision. “Allowing more employees to participate in the plan, along with more flexibility for participants to access their funds in emergencies, will increase the financial security of nonprofit workers in the long run,” said Hattie Greenan, PSCA’s director of research and communications.
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Other data highlights from the survey include:
Participation: 80% of eligible employees participate in their employer’s plan, deferring an average of almost seven percent of pay, with an average account balance of $93,957 for 2023.
Withdrawals: More participants had an outstanding plan loan in 2023 than the year before (16.5%, up from 10.3%) and more took a hardship withdrawal (1.3%, up from 0.6% in 2022).
Automatic Enrollment: The use of automatic enrollment is up by a third in just two years and is now used in 35.5% of plans, including more than half of large 403(b) plans.
Roth: Roth availability continues to climb with more than two-thirds now making it available a sanoption (68.2%).
Investments: The number of investments offered to participants increased for the third year in a row –organizations now offer an average of 25 funds in their lineups.
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