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.