A growing number of employers are implementing automatic escalation features in their company 401(k) plans to help employees save more for retirement. Automatic escalation automatically increases workers’ savings rate each year, often by 1 percentage point at a time, up to a predetermined cap. This mechanism aims to boost savings for employees who may not take action to increase their contributions on their own. While many workers may not realize that their savings rate is being automatically increased, it generally results in a positive outcome, as saving at least 15% of annual pay in a 401(k) plan is often recommended. This approach is designed to encourage people to save as much as they can for their retirement.
Auto-escalation is becoming more common as part of automatic enrollment in 401(k) plans, where employers divert a portion of workers’ paychecks into their retirement accounts if they do not voluntarily sign up. According to a survey by the Plan Sponsor Council of America, about 64% of companies with a 401(k) plan automatically enrolled workers in 2022, and of those, 78% also automatically increased workers’ savings rates. Most plans raise savings by 1 percentage point per year, with 84% following this pattern. While the additional amount deducted from each paycheck may only be a small percentage, such as raising savings from 6% to 7%, the cumulative effect over time can significantly increase retirement savings.
Employees can choose to opt out of automatic escalation, although many may not be aware of the change in their savings rate. Employers are required to notify workers when they are automatically enrolled in a 401(k) plan and inform them of the automatic escalation of their savings rate. However, these communications may go unnoticed by employees. Some companies are hesitant to implement auto-escalation in their 401(k) plans, concerned that it may place a financial burden on some workers. Among plans that automatically escalate savings, only 40% do so for all workers, while others target under-contributing employees or make escalation a voluntary choice.
Most 401(k) plans do not automatically raise savings beyond a predefined cap, often limiting automated worker contributions to 10% or less of annual pay. However, reaching the cap set by the plan does not necessarily mean that workers are saving enough for retirement. Employees have the option to voluntarily increase their savings rate above the automatic escalation amount to ensure they are saving an adequate amount for their future. While automatic escalation is a helpful tool to encourage retirement savings, workers should also take an active role in managing their contributions to ensure they are on track to meet their financial goals in retirement.
