In our daily lives we are becoming more and more accustomed to “automatic everything.” With this in mind, though some plan sponsors are fearful that stepping up auto-escalation could deter participation, industry experts point to evidence that suggests: go ahead! Auto-escalation could pave the way to secure retirement.
Increase from 1-2%?
Currently, most plan participants who enroll in auto-escalation choose the default: typically a 1% increase. However, this level of increase is not generally maximizing retirement savings potential. Toward more savings, some employers are considering raising the auto-escalation default to 2%, but wonder if doing so will result in declining participation in sponsored plans. Answers might be found in a new study conducted by Voya Behavioral Finance Institute for Innovation, in collaboration with Carnegie Mellon researchers. Results indicate that stepping up the pace of escalation could prove to be very beneficial, as the National Association of Plan Advisors (NAPA) reports:
…The study experimentally varied plan enrollees’ views of 1% or 2% default auto-escalation rates and whether the start date of the escalation was a year, six months or three months.
The researchers randomized the default auto-escalation options displayed to 22,170 new 401(k) enrollees across 398 plans. Note also that these plans used an opt-in enrollment process where employees had to choose whether they save and whether they want auto-escalation (different from automatic enrollment plans, where employees are often automatically assigned escalation features)….The results indicate…opportunity exists…to increase the default to 2% without significantly decreasing employee participation….The research found: Those who enrolled at a default of 1% remained at this escalation without a consideration of an increase. Among the employees who were shown a 2% default escalator and decided to participate in auto escalation, roughly half ultimately stuck with the default 2%.
Describing the findings, Tom Armstrong, the head of Voya’s Behavioral Finance Institute for Innovation points out: “We live in a world of ‘auto-everything,’ which has helped to provide greater opportunity for individuals to be saving more for their future,” said Tom Armstrong, head of. “But by helping workers get to the right savings rate in less time, employers have a real opportunity to design auto-escalation processes that help employees be more prepared for retirement.”
Investigating new plan design possibilities that could benefit participants is an important task for plan sponsors. Relatedly, it is also best practice (and very wise) for sponsors to revisit and update risk management plans, ensuring all necessary coverage is in place and up to date. Remember, national expert, Colonial Surety is here to help. Just select an affordable, package and receive a three point coverage solution in minutes, which includes:
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One Caveat: Timing
While paving the way for 2% auto escalation as a way to nudge retirement plan participants into greater saving, the recent study also pointed to a caveat related to timing. As NAPA sums up:
Among employees who decided to enroll in automatic escalation, a significant amount of them were also willing to escalate before 12 months had elapsed….One caveat is that the more aggressive default delays, which led to escalation beginning sooner, did modestly reduce escalation enrollment from 23% to 18%, the research shows. The key takeaway… is that, instead of setting default escalation increments at 1%, plan sponsors may be able to set them at 2% without significantly decreasing participation. And, while plans can also accelerate the pace of saving by setting their auto-escalation defaults to begin sooner, they should address the potential for lower enrollment.
Plan sponsors are reminded that whenever making decisions about the plan, a prudent decision making process must be implemented—and documented. As experts explain:
ERISA is not a prescriptive law; plan sponsors, fiduciaries and advisors have wide latitude in their decisions. As recent litigation trends have illustrated, no type of feature or investment, from target date funds to low-cost solutions and other innovative products, appears to be “safe” from a legal challenge. As a result, regardless of whether a plan sponsor, fiduciary or advisor recommends or utilizes a widely adopted solution or a newer, more innovative solution, documentation in whatever form might be appropriate for the situation is key.
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