As you’re reading this, you may be saving more for retirement than you had planned. And that’s good news, because every dollar counts when you think about expenses and the cost of living after retirement. This is because many employers are implementing a kind of ”auto-escalation” in 401(k) plans as a strategy to overcome the inertia that often prevents us from saving enough.
This positive and automated practice, which is expanding in the United States, means that a gradual increase in the savings rate of workers is activated every year, usually it is one percentage point until a certain set limit is reached. Its objective is to encourage additional retirement savings when workers have not taken the initiative themselves.
Discovering the 401(K) Automatic Increments
Ellen Lander, founder of Renaissance Benefit Advisors Group in New York, explains that many workers may not notice this gradual increase in their savings. However, from a general perspective, this is positive, since in an ideal scenario, workers should save at least 15% of their annual income in a 401(k) retirement plan, including both their own contributions and those of the employer.
Automation of savings in 401(k) plans has become increasingly common along with automatic enrollment, where employers divert a portion of workers’ wages to these plans if they don’t voluntarily enroll.
According to the Plan Sponsor Council of America survey, about 64% of companies or employers with 401(k) plans implemented automatic enrollment in 2022, and of these, 78% automatically increased workers’ savings.
Turning Your Retirement Savings Into a Treasure
Let’s take an example to better understand this complicated world of automatic savings in 401(k) plans. Imagine that a woman named Maria is receiving $75,000 a year in salary, and she contributes 6% of her salary to her 401(k) retirement savings plan, receiving two paychecks a month.
Let’s say you’re hypothetically saving $4,500 a year, about $187.50 for each paycheck. If the savings rate is increased to 7%, that is, one percentage point compared to the previous year, their savings increase to $5,250, or $218.75 for each paycheck, which presents a relevant $31.25 more for each check.
Importantly, employees have the option to opt out of this agreement, and employers are required to inform them about their automatic enrollment in the 401(k) plan and the increase in the savings rate. However, these warnings may go unnoticed by many workers.
Some employers or companies prefer not to activate automatic escalation because they believe that it can be “onerous” and that it represents too great a financial burden for some workers.
Companies’ Approaches to 401(k) Saving Increments
According to the recent survey, among companies with 401(k) plans that use automatic enrollment, only 40% automatically increase savings for workers, according to the Plan Sponsor Council of America. On the other hand, about 12% do it only for investors who “contribute too little”, while 26% make escalation a voluntary option for workers.
There is a group of 22% of companies or employers who have preferred not to offer the option definitively. The vast majority of 401(k) plans don’t automatically increase savings beyond a limit, and nearly two-thirds, or 63%, limit those automated worker contributions to 10% or less of annual salary.
