Beware this one downside to automatic escalation
January 8, 2009 by Jennifer AzaraPosted in: Benchmarking, Benefits, Communication tips, In this week's e-newsletter, Latest news & views, Management issues
There’s no shortage of benefits from adding an automatic enrollment feature to your 401(k). But be aware of this one pitfall.
Getting employees to sock money away for retirement is a victory all its own. And adding features like automatic enrollment and automatic escalation can greatly further your crusade.
Since the feds green-lighted an employer’s ability to mandate these features just over a year ago, many of your peers have been fast to add them.
With good reason – check out the predicted positive impact of auto escalation on overall 401(k) accumulations:
- Between 11% and 28% for participating employees in the lowest income quartile, and
- Between 5% and 12% for participating employees in the highest income quartile.
That comes from the Employee Benefits Research Institute.
But be careful! There seems to be a real downside to automatic escalation: Employees don’t save as much as they could!
Under most auto escalation features, employee contributions increase from a starting 3% to a top out of 6%. That’s far short of the 15% allowed by law.
So employees may be shortchanging themselves on the savings. Be sure to remind folks just how much they could be setting aside for their golden years.
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Tags: 401 (k), Automatic enrollment, Automatic escalation, Employee Benefits Research Institute, Highest income quartile, Lowest income quartile
January 17th, 2009 at 3:56 pm
There is no 15% legal limit in a 401(k). The legal limit is 100% of taxable wages up to annual limits of $16,500, plus $5,500 more (“catch-up”) in 2009.
But, you are correct that auto enrollment is not as effective if it does not include an auto escalation feature in subsequent years.