While use of auto enrollment is rising among 401(k) plans, the adoption of auto escalation — where deferral rates are programmed to rise incrementally over time — has been slower, even though plan participants indicate they would like to use it.
Recent research found that 70% of those eligible to participate in a 401(k) plan and expecting to retire in five or more years indicated they would be at least somewhat likely to sign up for an auto escalation feature if it was offered. The same study found the uptake of auto escalation had hardly advanced since 2013, with only 28% of those eligible for a 401(k) plan enrolled in auto escalation.
Who are the auto escalators?
Source: Putnam Investments Lifetime Income Survey, 2014.
Those who indicated a preference for auto escalation come from a diverse group of households. In fact, 20% of those interested in auto escalation had an annual household income of less than $50,000.
Expanding what works
Automatic design features have proven to be successful in helping workers become better prepared for retirement. Households participating in a 401(k) plan designed with automatic escalation are on track to replace 98% of their current income in retirement, according to the study.
Auto escalation can take participants one step further in the battle against inertia. The adoption of a full range of automatic features should be part of our industry standard for 401(k) plans.
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Putnam Lifetime Income Survey 2013 from Putnam Investments 284969