Enhancing Retirement Plan Offerings with Auto-Enrollment and Auto-Escalation

Increased participation in corporate retirement plan offerings can be a win-win for employees and employers alike. In a recent article, we provided an overview of five innovative plan features that could increase the likelihood of greater plan participation; here, we’d like to dive a little more deeply and focus on the potential for enhancing retirement plan offerings with auto-enrollment and auto-escalation.

Automated features by the numbers

When it comes to retirement plan offerings, automated features like auto-enrollment and auto-escalation are gaining attention with findings like those of the 2018 T. Rowe Price reference point benchmarking study. These features have been linked statistically with greater plan participation, with plans incorporating auto-enrollment seeing 96% higher participation than those without.

Further research sheds light on how automated features capitalize on participant behavior to increase the likelihood of plan participation and, consequently, the likelihood of getting closer to retirement readiness goals. The features take advantage of the tendency to enjoy the ease of automated settings over manually opting out; in fact, a 2017 Financial Wellness Survey by the Principal Financial Group found that over 80% of participants retain the auto-escalation feature when it’s built into plan design.

Benefits of automated features

Features like auto-enrollment, in which new hires are set up to automatically contribute to employer-sponsored retirement plans and/or automatically renew enrollment for employees each year, and auto-escalation that automatically increase the contribution rate by a set percentage annually have been linked to multiple benefits. As mentioned above, increased plan participation which can lead to a better chance of achieving retirement readiness goals is a boon to employees, but the potential benefits don’t stop there. Here are a few more to consider:

  1. Automated features can result in better compliance testing results and therefore potentially greater opportunity for highly compensated employees to participate without restriction.  Most retirement plan offerings undergo annual testing to ensure that they are not structured to favor highly-compensated employees. This testing seeks to eliminate discrimination by making sure that the contribution level for highly compensated employees maintains a certain correlation with the contribution rate for the rest of the employee base. When automated features raise contribution rates for employees who would otherwise not participate, or perhaps participate at a lower level, it raises the ceiling for what’s possible in terms of contributions from highly compensated employees who are eager to add more to their retirement savings. This is not only advantageous to highly compensated employees, but to organizations looking to attract top talent for high-level positions.
  2. A robust 401(k) or retirement plan offering with enhancements like automated features can be an attractive draw for quality employees. Many employees, especially those at the executive level, consider a 401(k) a must-have in a benefits package, providing not only an avenue for retirement savings but a sense of assurance that a prospective employer is committed to the future financial success of its employees.
  3. It’s a relatively effortless way to upgrade a plan offering. Adding automated features like auto-enrollment and auto-escalation is a fast and easy way to provide the potential for significant benefit to employees. Typically, all that’s needed to incorporate these features into your plan offering is a simple amendment and a notice to employees. Participants always retain the right to opt out of automated features, so while saving for retirement is made easier, their autonomy and freedom of choice are preserved.

The ease of incorporating automated features and their demonstrated connection to enhanced participation makes them an option worth considering for plan sponsors. Contact N1 Advisors to discuss how automated features may make your retirement plan offerings more successful for current employees, and more appealing to the top talent you wish to attract.