Auto-escalation best practices for retirement plan and participant success

Helping employees prepare for retirement is challenging yet critically important. Two key strategies are:

1. Encouraging them to contribute to their retirement plans in the first place, and 
2. Increasing those contributions over time.

While many Americans are underprepared for retirement, new laws aim to make it easier:

The SECURE Act of 2022 (SECURE 2.0) will require employer-sponsored DC plans to automatically enroll eligible employees, and automatically increase contributions by 1% until it reaches 10–15% of employee compensation, for plan years beginning after December 31, 2024.¹

Experienced plan sponsors know it’s hard to get employees to contribute, and maybe even harder to convince them to increase their contributions.

It’s clearly a common challenge, with 28% of non-retired Americans reporting no retirement savings at all.² Among those with retirement savings, 54% had theirs in defined contribution (DC) plans.² So it’s also clear how important this benefit is for U.S. workers to get retirement-ready.

Combining auto-enrollment and auto-escalation can help participants get closer to their retirement savings goals— maybe a bit faster than they might without a little extra push in the right direction.

Let’s take a closer look at auto-escalation’s benefits, potential pitfalls and best practices for plan sponsors and financial professionals to help participants save for a more financially secure future in retirement.

How auto-escalation may help boost retirement savings

Nudge employees toward financial security

Auto-escalation is an effective way to steer employees toward financial self-sufficiency in retirement by eliminating their need to act in order to save. When small, consistent increases in contribution rates are automated and timed with intention and care, they can take out some of the “sting” employees may feel — and help them increase contributions without getting stuck in overanalyzing their options.

Leverage the power of compound growth — and maximize time

Financial experts consistently stress the power of time in driving investment outcomes, and auto-escalation helps ensure plan participants regularly up the ante. Rather than wait for employees to decide they finally have “enough” to set more aside, auto-escalation helps them start reaping the benefits of compounding — without having to meet a list of arbitrary criteria.

Nurture a culture of saving and planning

When employees see their retirement portfolios grow — even if it’s gradual and without their direct decision-making — it can generate ripple effects that impact their financial well-being in other areas. A culture of savings within the company can take root, encouraging even the most hesitant of savers to participate.

Reduce financial anxiety and its effects

Financial stress is pervasive and it can spill over into other aspects of life, like attendance and performance at work. Auto-enrollment and auto-escalation can help address some of the stress employees may experience — especially those who struggle with financial inaction. Knowing that their contributions aren’t just static, but continue to increase over time, can help plan participants feel more in control of their financial futures.

7 auto-escalation best practices for sponsored DC plans

Navigating the complexities of DC plans can be challenging, but thoughtful implementation can make a difference.

1. Start with an optimal rate that takes advantage of an employer match

Enrolling participants at a rate that takes advantage of an employer match can help them maximize the plan’s benefits from the get-go. If your plan doesn’t offer a match, consider this factor in your next plan review to help ensure your total compensation offering is truly competitive.

2. Educate on the mechanics of auto-enrollment and auto-escalation

Knowledge is power, and here, it’s all about the power to save effectively. Include clear, timely explanations of auto-enrollment and auto-escalation in your employee financial education program to preempt confusion and foster greater participation. 

Tailor content and delivery methods to meet the diverse needs reflected in your employee demographics, life stages and work environments. Consider the needs of remote, hybrid and in-person employees, as well.

3. Make auto-escalation coincide with salary adjustments

Whenever possible, time auto-escalation to coincide with salary reviews or increases. This makes the “pinch” of rising contributions less noticeable while powering up contributions.

4. Cap the annual increase to keep it reasonable

While the aim is to boost savings rates and maximize the period, be sure to set a reasonable cap on annual contribution increases so that saving for retirement doesn’t become financially burdensome — especially for lower-wage employees.

5. Don’t make it too hard to opt out

While auto-escalation is designed to encourage savings and nudge employees into better financial habits, it still has to feel like the personal choice it is. Make the opt-out option easy to understand and easy to navigate, so participants can feel like they’re making a sound decision as they work toward financial freedom in retirement.

6. Include auto-escalation in your annual plan review

Auto-escalation is all about avoiding stagnation, so you can apply the same thinking to keep improving your plan. Regularly assess auto-escalation’s effectiveness in your plan. Use analytics to gauge participation rates, contribution levels and overall plan health, and make any adjustments.

7. Ensure compliance and keep plan documents up to date

Regulatory compliance isn’t just a box to check; it’s a cornerstone of effective plan management, and it’s at the heart of accountability for plan fiduciaries. Ensure your auto-escalation feature complies with relevant laws and regulations. Get professional guidance on legislative and regulatory changes, adapt your plan accordingly and make sure plan documents are always up to date.

Auto-escalation isn’t a remedy for retirement savings troubles, but it may help remove some of the barriers to saving and investing for retirement. By understanding its benefits and implementing it thoughtfully, plan sponsors can play a pivotal role in helping Americans bridge the retirement savings gap.

SOURCES
¹ U.S. Senate Finance Committee, SECURE Act 2.0, 2022.
² Federal Reserve, Economic Well-Being of U.S. Households in 2022, May 2023.

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