How to auto-escalate your retirement plan
The introduction of auto-enrollment and auto-escalation of 401(k) plans has helped transform the retirement system, making it easier for employees to save earlier and save more over time. However, understanding and implementing the details of an auto-escalation process is of critical importance, as escalator features are crucial for helping enrolled participants save for their future and create financial wellness.
Given the current labor market trends where we’re seeing a shortened tenure of employees, it’s critical to get workers to the right savings rate sooner rather than later. However, in a world where we’re now hearing about and/or getting accustomed to “auto-everything,” practical questions are still unanswered.
- How does a plan sponsor design a successful auto-escalation plan?
- What increment should the escalator increase to?
- How often should that rate increase?
This paper details the results of research into those important questions, which employers can use to help optimize their own plan design.
The study
- Researchers experimentally varied whether an enrollee would see a default escalator of 1% or 2% and whether the start date of the 401(k)-contribution rate escalation was a year, six months, or three months.
- These plans used an opt-in enrollment process, where employees needed to decide to enroll in the retirement plan or in auto-escalation, instead of automatic enrollment plans.
- The escalation choices of the enrollees were observed for several months.
Check out the paper to learn more about the study, what researchers found, and view the results with key takeaways.