Are you unknowingly saving more money for retirement? The rise of automation in company 401(k) plans may be the reason behind your increased savings without you even realizing it.
Automatic escalation, or auto-escalation, is a popular mechanism that automatically boosts workers’ savings rate each year, typically by 1 percentage point at a time up to a certain cap. The goal is to help individuals build a larger nest egg by overcoming the inertia that often prevents us from taking action on our own.
Ellen Lander, founder of Renaissance Benefit Advisors Group, emphasizes the importance of saving at least 15% of one’s annual pay in a 401(k) plan, including both personal contributions and employer matches. Auto-escalation may not be noticeable in the amount deducted from each paycheck, but it ultimately benefits individuals in the long run.
The prevalence of auto-escalation has increased alongside automatic enrollment, where employers divert a portion of employees’ paychecks into a 401(k) if they don’t opt-in voluntarily. According to the Plan Sponsor Council of America, about 64% of companies with a 401(k) plan automatically enroll workers, with 78% of them also automatically increasing workers’ savings rates.
Employers typically raise workers’ savings rate by 1 percentage point annually, resulting in a slight increase in savings per paycheck. Employees have the option to opt out of this arrangement, but many companies are hesitant to implement auto-escalation for all workers due to concerns about financial burdens.
While the vast majority of 401(k) plans cap automated worker contributions at 10% or less of annual pay, it’s essential for individuals to proactively set their savings rate higher if they wish to save more. By understanding and taking advantage of auto-escalation, individuals can effectively boost their retirement savings without even realizing it.
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