Employers could use auto-escalation as a way to encourage 401(k) participants to increase their contributions and reduce the number of employees missing out on matching contributions from the plan sponsor. That’s the finding by WorldatWork and the American Benefits Institute, which said that nearly a third of U.S. retirement plan sponsors they surveyed think more than half of their plan participants are “leaving money on the table” by failing to contribute enough to receive company matching contributions.
In “Trends in 401(k) Plans and Retirement Rewards,” released in March, 34 percent of respondents said they believe that more than 50 percent of their participants are not contributing enough of their salary to qualify for the full employer match.
The two nonprofit human resources and retirement industry organizations running the study tabulated 490 responses about their retirement plans collected in November 2012 from WorldatWork members with benefits responsibilities. Ninety-four percent of respondents said they offer a 401(k) retirement plan to their employees, and 71 percent were large enterprises, with more than 1,000 workers.
Auto-escalation Characteristics
The plans that provide auto-escalation start it at a fairly low threshold. More than half of the plans in the survey that do offer this option (26 percent of all respondents pair automatic enrollment with auto-escalation) set the initial default employee contribution amount between 3 percent and 4 percent, they said. This is in line with the minimum initial default required under the Pension Protection Act of 2006 for a “safe harbor” automatic contribution setup that allows employers to avoid satisfying nondiscrimination rules.
Yet companies in this survey that did not offer an auto-escalation feature required a higher default contribution. Forty-two percent of employers without this savings option said they had a default employee contribution rate greater than 4 percent. Among companies with an auto-escalation feature, only 27 percent reported a default employee contribution higher than 4 percent.
In response to the findings about the number of participants missing their company match, the report authors said “employees not taking full advantage of the match might benefit from an auto‐escalation provision in the plan, which could gradually drive them toward the full matching contribution.”
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