Rosalind Evans
You may be saving more money for retirement and not even know it. An increasing share of employers are automating how people save in their company 401(k) plans to overcome the inertia that often keeps us from building a nest egg.
The Rise of Auto-Escalation
“Automatic escalation” — or auto-escalation, for short — is one of those popular mechanisms. It automatically raises workers’ savings rate yearly, often by one percentage point at a time up to a cap. The intent is to help boost savings when workers might not act independently. However, the additional money from each paycheck may be indiscernible to many people. “I have a bet they don’t realize it,” said Ellen Lander, founder of Renaissance Benefit Advisors Group, based in Pearl River, New York.
Ideal Savings Goals
In an ideal world, workers would save at least 15% of their annual pay in a 401(k) plan, Lander said. This includes their contributions and employer contributions, such as a company match. The ideal rate may fluctuate depending on factors like age and outside savings. “Philosophically, I think auto-escalation makes perfect sense,” Lander said. “We want people to save as much as they can.”
Automated 401(k) Savings Is More Widespread
Auto-escalation has become more widespread alongside automatic enrollment, when employers divert a portion of workers’ paychecks into a 401(k) if they don’t sign up voluntarily. According to an annual survey by the Plan Sponsor Council of America, a trade group, about 64% of companies with a 401(k) plan automatically enrolled workers in 2022. Of those companies, 78% also automatically increased workers’ savings, up from 65% in 2013, according to the poll. Most, or 84%, of these 401(k) plans raise workers’ savings rate by one percentage point yearly.
How Auto-Escalation Works
Here’s a basic illustration of how it works: A worker earns $75,000 a year, contributes 6% of their annual salary to a 401(k), and is paid twice a month. This person saves $4,500 a year, or $187.50 per paycheck. Raising the savings rate to 7% brings annual savings to $5,250, or $218.75 per pay cycle — amounting to just $31.25 more per paycheck. (This example excludes additional financial factors like taxes or annual pay increases.)
Employee Choices and Employer Concerns
Employees can opt out of the arrangement. Employers must also notify workers that they are automatically enrolled in a 401(k), and their savings rate will increase. Still, such communications may need to be noticed. Many companies are hesitant to add auto-escalation altogether because they fear it may be “onerous” and place too much of a financial burden on some workers, Lander said.
Statistics and Current Trends
Among 401(k) plans that use automatic enrollment, just 40% automatically escalates savings for all workers, according to data from the Plan Sponsor Council of America. About 12% do so only for investors who are “under-contributing.” And 26% make escalation voluntary for workers, while 22% don’t offer it. Most 401(k) plans don’t automatically raise savings beyond a cap, and nearly two-thirds, or 63%, limit those automated worker contributions to 10% or less of annual pay. Of course, reaching the cap doesn’t necessarily mean workers are saving enough. Workers can voluntarily set their savings rate higher.
Automated 401(k) savings plans are helping many workers save more for retirement without even realizing it. With mechanisms like auto-escalation, employers are making it easier for employees to build their nest eggs and secure their financial futures. While there are still challenges and choices to be made, the trend towards automation in retirement savings is a positive step towards better financial security.
