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2016
Dec 06

Auto-Escalation Should be Offered in Conjunction with Auto-Enrollment

savings jarAccording to the J.P. Morgan Asset Management 2016 Defined Contribution Plan Participants survey, data suggests that the average 401(k) plan deferral rates have been trending downward even though more employers are adopting auto-enrollment. If employers are auto-enrolling 401(k) plan participants without also incorporating auto-escalation, it may not be as productive as intended. Many plans use very low auto-deferral rates and 18% of participants surveyed have never increased their contribution amounts.

Stats Tell the Story
The most common auto-enrollment default deferral rate is only 3%. This is well below the average annual contribution rate, which is between 7-8%. As noted above, many participants never increase this rate. Forty-five percent of surveyed employers auto-enroll new participants but only 31% of them have auto-escalation features built in.

What are the benefits of auto-enrollment? According to the Department of Labor, studies suggest that less than 15% of employees opt out of plans with auto enrollment. This feature can help attract and keep talented employees, increase plan participation and help employees begin saving for their future.

What is auto-escalation? When employers incorporate auto-escalation, contribution levels are automatically increased at regular intervals. The most common interval is 1% per year.

Sixty-eight percent of the participants surveyed know they are not saving enough for retirement. Seventy-five percent of participants surveyed are in favor of automatic enrollment and escalation. For participants under the age of 30, the auto enrollment feature is even more attractive. The survey also shows that plans with auto escalation have a satisfaction rate of 97%. Finally, 82% of participants agree that employers should encourage employees to contribute to the company retirement plan.

Employers also need to educate their employees on these topics. Auto-enrollment increases the percentage of employees who participate in the plan but results in lower savings since many do not increase their deferral rates. Proper educational sessions and auto escalation can help bump up the savings.

Change is in the Air
Many studies show that employers should increase the auto enrollment deferral rate and the auto escalation intervals, so within a few years, participants are saving at a higher rate. As mentioned, most plans auto escalate at only 1% per year. Plans should consider increasing this to at least 2% and auto enrolling at 6% so savings are over 10% within a couple of years.

When these features are properly implemented, they can make a positive difference. Contact your benefits specialist to learn how to use both auto-enrollment and auto-escalation clauses to help benefit your employees.

For more information, contact Stephanie Zaleski at szaleski@orba.com, or call her at 312.670.7444. Visit ORBA.com to learn more about our Employee Benefit Plans Services.

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