Automatic Enrollment and Auto Escalation Boost Participation and Savings Rates

October 09, 2019

The use of auto features in 401(k) plans has continued to climb in popularity over the past decade. In fact, auto features such as automatic enrollment and auto-escalation are considered best practices in 401(k) plan design as ways to help boost participation and employee savings rates.¹

Many large 401(k) retirement plans offer auto features. However, small business plan sponsors have been slower to adopt them as part of their 401(k) plan design. If your company’s 401(k) plan design doesn’t currently include auto features, and/or if you’re thinking about implementing them, then keep reading.

Small Plans Playing Catch-up

The majority of retirement plans (60%) use automatic enrollment. However, there is a noteworthy disparity between the usage of auto-enrollment in large versus small 401(k) plans. Two-thirds (66%) of large plans (those with assets of $200 million or more) use automatic enrollment as compared to 51% of smaller plans (those with assets of less than $200 million).¹

Simply stated, auto-enrollment occurs when an employee reaches the plan’s eligibility requirements and is then automatically enrolled in the company’s retirement plan.

Likewise, the uptake of auto escalation — a plan feature that automatically increases participants’ contributions each year up to a specified limit — is more prevalent in large than in small plans. Fifty-eight percent of large plans use auto escalation versus just 40% of small plans. Among plans with auto escalation, the majority increase participant deferrals by 1% per year.¹

When an employee starts saving earlier (auto-enrollment) and is regularly nudged to save more (auto escalation), these two plan design features can have a substantial impact on that employee’s future retirement savings. Plan sponsors have the power to implement ideas that encourage better retirement savings.

The Impact of Auto Features

Automatic enrollment can significantly improve plan participation. According to a recent survey from the Defined Contribution Institutional Investment Association (DCIIA), before the implementation of automatic enrollment, only 11% of plans had participation rates over 90%. Post-implementation, the percentage of plans with more than 90% participation increased more than fourfold to 46%.¹

In addition, since automatic enrollment increases plan participation, it also improves the likelihood of a plan passing nondiscrimination testing.

What’s more, automatic enrollment improves savings rates, and adding auto escalation further boosts the impact. In plans with neither automatic enrollment or auto escalation, only 44% have savings rates above 10% (includes both employee deferrals and employer matching contributions). In plans that implement automatic enrollment only, the percentage of participants with savings rates above 10% increases to 67%. Where plan sponsors have implemented both automatic enrollment and auto escalation, that percentage rises to 70%!¹

Financial experts recommend that workers save between 10-15% of their pay each year to achieve a comfortable retirement.² According to DCIIA, a combination of automatic enrollment and auto escalation is helping more 401(k) plan participants hit that goal, thus increasing their chances of being better prepared for retirement.

Getting Smaller Employers on Board

Despite the stated positive impacts of auto features on retirement readiness, some employers have chosen not to adopt them for a variety of reasons. One top concern is the fear of employee pushback, including worries that employees will complain.³

However, many real cases and research studies have found that these concerns are largely unfounded. Opt-out rates for both automatic enrollment and auto escalation are negligible, suggesting that even if employees have initial concerns about the implementation of these plan design features, they generally do not act (i.e., opt out)⁴.

There is no one-size-fits-all retirement plan design. However, if your plan goals include boosting participation, increasing employee deferrals, passing nondiscrimination testing, and improving overall retirement readiness, CONTACT US to learn more about automatic enrollment and auto escalation. The implementation of auto features in your company’s 401(k) plan may be a solution worth exploring.

To learn more about our 401(k) services for employers, please click here.

¹DCIIA Fourth Biennial Plan Sponsor Survey “Auto Features Continue to Grow in Popularity.” December 2017.
²O’Shea, Arielle. “How Much Should You Save for Retirement?” NerdWallet. August 2017.
³Goldstein, Justin, AIF. “Adding Automatic Features to your 401(k) Retirement Plan.” Bronfman Rothschild. 2017.
⁴DCIIA Fourth Biennial Plan Sponsor Survey “Auto Features Continue to Grow in Popularity.” December 2017.

Advisory services offered through Allworth Financial, a Registered Investment Advisor | Disclosures | Privacy Policy

Securities offered through AW Securities, a Registered Broker/Dealer, member FINRA/SIPC. Check the background of this firm on FINRA's BrokerCheck.

HMRN Insurance Agency, LLC license #0D34087

¹Barron’s 2024 Top 100 RIA Firms. Barron's© magazine is a trademark of Dow Jones L.P. The ranking of independent advisory companies is based on assets managed by the firms, growth, technology spending, succession planning, and other metrics.

² Retention Rate Source: Allworth Internal Data, FY 2022

³ The NBRI Circle of Excellence Award is bestowed upon NBRI clients meeting one or both of the following criteria: Total Company score at or above the 75th percentile of the NBRI ClearPath Benchmarking Database and/or improvement of five (5) or more benchmarking percentiles in Total Company score over the previous survey.

⁴ As of 7/1/2024, Allworth Financial, an SEC registered investment adviser and AW Securities, a registered broker/dealer have approximately $22.5 billion in total assets under management and administration.

⁵ InvestmentNews 2020 and 2021 Best Places to Work for Financial Advisers. The ranking reflects survey responses and scores completed by both employers and employees. Employers report their organization’s workplace policies, practices, and demographics. Employees complete a survey designed to measure the employee experience.

⁶ 2021 Value of an Advisor Study / Russel Investments

⁷ Ranked 9th Top Wealth Managers By Growth in Assets in the U.S. from RIA Channel, 2022. RIA Database and RIA Channel are registered trademarks owned by Labworks, LLC.

⁸USA Today Best Financial Advisory Firms 2024. The ranking is based on the growth of the companies’ assets under management (AUM) over the short and long term and the number of recommendations they received from clients and peers.

⁹NBRI Best in Class Ethics 2023. The Best in Class level is bestowed upon clients performing at or above 90 percentile of the NBRI ClearPath Benchmarking Database.

^✢ Scott Hanson, Investment Advisor 2005, 25 most influential people in the financial services industry. The ranking reflects 25 people who Investment Advisor magazine believes have had or will have the greatest influence on the financial services industry.

^✼Pat McClain, InvestmentNews 2014, Invest in Others Community Service Award, presented to an advisor who has made an outstanding impact on a community through managerial contributions to a non-profit organization.

^†Financial Times, FT 300 Top Registered Investment Advisers, June 2019. The ranking reflects six areas of consideration including the company's years in existence, industry certifications of key employees, AUM, asset growth, SEC compliance record and online accessibility and calculates a numeric score for each company.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.