Encouraging responsible savings habits can certainly start with automatically signing employees up for a plan. Once enrolled, however, most employees are content to simply leave their default deferral percentage—often between 3% and 4%2—untouched. More is needed to get them to prepare for the future through the use of higher deferral rates.
Today’s retirement plans utilize automatic escalation to boost savings rates among employees instead of relying on manual deferral increases that are unlikely to be elected.
Automatic escalation allows employees to gradually increase their deferral rates over time. The increases needn't be dramatic—upping deferral rates by just 1% each year can have a meaningful impact on retirement savings balances. When deferral rates are raised in tandem with an annual increase in pay, employees are less likely to notice the effect it has on their paychecks.
Support for automatic escalation of deferral rates has been growing. Ted Benna, creator of the first 401(k) retirement savings plan, has stated that he would make it mandatory for every company with such a plan to automatically enroll employees at 3% of pay and automatically increase that number by 1% every year to a maximum of 10%.3
Research conducted by WorldatWork and the American Benefits Institute suggests that Mr. Benna’s recommendations are being heard, as a survey of employer-sponsored retirement plans showed that 97% of companies that offer automatic escalation increase the default by 1% each year.4
At the employee level, plan features like automatic escalation can significantly affect how savers view their retirement security. Recently published findings by Putnam Investments revealed that employees using auto escalation were more confident about their retirement than those who didn't use the feature. In addition, households using automatic escalation had higher investable assets and a slightly higher average deferral rate.5
Plans that use automatic features are likely to see improvement in helping employees save for retirement. Automatically enrolling employees and gradually increasing their salary deferral rates over time can put them in a better position to achieve retirement readiness.
1 As of February 1, 2012.
2 Source: WorldatWork and the American Benefits Institute, "Trends in 401(k) Plans and Retirement Rewards." March 2013. http://www.americanbenefitscouncil.org/documents2013/abc-waw-surveytrendsin401kplans-2013.pdf.
3 Source: Kujawa, Patty. Workforce, "A ‘Father's' Wisdom: An Interview With Ted Benna." January 20, 2012. http://www.workforce.com/articles/a-father-s-wisdom-an-interview-with-ted-benna.
4 Source: Source: WorldatWork and the American Benefits Institute, "Trends in 401(k) Plans and Retirement Rewards." March 2013. http://www.americanbenefitscouncil.org/documents2013/abc-waw-surveytrendsin401kplans-2013.pdf.
5 Source: Van Harlow, W. Putnam Investments, "Lifetime Income Scores III: Our latest assessment of retirement preparedness in the United States." April 2013. https://www.putnam.com/literature/pdf/DC939.pdf.