Employers are increasingly automating how people save for retirement in their company 401(k) plans by implementing automatic escalation, or auto-escalation. This mechanism automatically raises workers’ savings rate each year, often by 1 percentage point at a time up to a cap. The intent is to help boost savings when workers might not take action on their own. Many individuals may not even realize this is happening, but it is generally a positive move towards increasing retirement savings. Ideally, workers should be saving at least 15% of their annual pay in a 401(k) plan, including both their own contributions and employer contributions like a company match.
Auto-escalation has become more widespread alongside automatic enrollment, where employers divert a portion of workers’ paychecks into a 401(k) if they don’t sign up voluntarily. In 2022, about 64% of companies with a 401(k) plan automatically enrolled workers, and 78% of these companies also automatically increased workers’ savings rate. Most plans raise workers’ savings rate by 1 percentage point a year. Employees can opt out of this arrangement, but many may not even be aware of it due to potentially unnoticed communication from their employers. Companies may be hesitant to add auto-escalation altogether, fearing it may place too much financial burden on some workers.
Among 401(k) plans that use automatic enrollment, just 40% automatically escalate savings for all workers. About 12% do so only for under-contributing investors, while 26% make escalation a voluntary choice, and 22% do not offer it at all. Additionally, the majority of 401(k) plans do not raise savings beyond a certain cap, and nearly two-thirds limit automated worker contributions to 10% or less of annual pay. Workers are encouraged to voluntarily set their savings rate higher if reaching the cap does not necessarily mean that they are saving enough.
The ultimate goal of auto-escalation in 401(k) plans is to encourage workers to save as much as they can for retirement. By automatically increasing savings rates each year, employees are gradually increasing their retirement nest egg without having to take any additional actions. While some workers may not be aware of this practice, it is generally seen as a positive move towards long-term financial security. Employers are increasingly implementing automatic enrollment alongside auto-escalation to help overcome the inertia that often keeps individuals from saving for retirement on their own.
In an ideal situation, workers would be saving at least 15% of their annual pay in a 401(k) plan. This target amount includes both their own contributions and any employer contributions, such as a company match. The ideal savings rate may vary based on factors like age and outside savings. While automation in 401(k) plans is becoming more common, there are still challenges and hesitations among employers regarding the implementation of auto-escalation. Overall, the shift towards automated savings mechanisms in retirement plans is seen as a positive step towards helping individuals secure their financial future in retirement.
