The Case for Automatic Enrollment and Escalation
Nate Moody, CPFA – RETIREMENT ADVISOR, PARTNER
December 2024
As a 401(k) plan sponsor, your role is pivotal in helping employees secure their financial futures. Yet despite offering a well-designed plan, many employees fail to enroll or save adequately. Why? Research reveals that behavioral and practical barriers often prevent individuals from taking advantage of their workplace retirement plans.
This is where automatic enrollment and escalation can make a transformative difference. These features help plan sponsors overcome common barriers to participation, leveraging behavioral tendencies to improve outcomes. Here’s why adding automatic features to your plan is a smart, strategic move.
The Problem: Barriers to Enrollment
According to research by Principal Financial Group, employees fail to enroll in 401(k) plans for a variety of reasons, including:
- Procrastination: Many individuals acknowledge the importance of saving for retirement but delay signing up, assuming they’ll “get to it later.”
- Complexity: The perceived complexity of investment choices and contribution decisions can overwhelm employees, leading to inaction.
- Competing Financial Priorities: Balancing immediate expenses like rent, student loans, or childcare often leaves employees feeling they can’t afford to save.
- Lack of Awareness: Some employees are simply unaware of the plan’s existence or the benefits it offers.
These challenges often stem from behavioral biases such as inertia and default bias. When faced with too many decisions or competing priorities, many individuals opt for the path of least resistance: doing nothing1.
The Power of Automatic Enrollment
Automatic enrollment eliminates the need for employees to take that first step. Instead of requiring them to actively sign up, it makes participation the default. This subtle shift has a profound impact on participation rates.
Plans with automatic enrollment have participation rates exceeding 82%, compared to just 55% for plans without it, according to Deloitte’s research2. This improvement is especially pronounced among demographics traditionally underrepresented in retirement savings, such as younger workers, minorities, and lower-income earners.
Moreover, the NEST Insight report highlights that automatic enrollment significantly boosts long-term savings behavior. While there may be a slight increase in debt for some participants, the report emphasizes that the majority experience substantial benefits from enhanced retirement readiness. Importantly, the study found no evidence of financial harm for the vast majority of employees3.
Why Automatic Escalation Complements Enrollment
While automatic enrollment gets employees into the plan, automatic escalation ensures they don’t stop at the minimum contribution level.
Many employees, especially those new to saving, start at the default rate—often around 3%—and never increase their contributions. However, most experts recommend saving 10-15% of income to achieve long-term retirement goals.
Automatic escalation bridges this gap by gradually increasing contribution rates, typically by 1% annually, until a preset cap is reached. Employees are less likely to notice incremental increases, and because these adjustments often coincide with salary raises, they rarely feel a financial pinch.
The results speak for themselves: Plans with automatic escalation consistently achieve higher average account balances over time compared to those without it.
Addressing Employees’ Concerns
Plan sponsors often worry about potential employee pushback to automatic features, but the evidence shows these fears are largely unfounded.
- Low Opt-Out Rates: Research consistently finds that opt-out rates for automatic enrollment are typically under 10%4. Employees overwhelmingly accept the default, which underscores the power of behavioral nudges.
- Gradual Escalation: Similarly, most employees don’t object to automatic escalation. A slow, steady increase in contributions is often perceived as a helpful feature rather than a burden.
By addressing the root causes of non-participation—procrastination, complexity, and competing financial priorities—automatic features empower employees to take control of their financial futures.
Making the Case for Action
Automatic enrollment and escalation leverage behavioral science to combat the inertia and complexity that prevent employees from participating in and maximizing their 401(k) plans. These features have been proven to dramatically improve participation rates, savings levels, and overall financial wellness.
At Lebel & Harriman, we believe that plan sponsors have a unique opportunity to empower employees to achieve a secure financial future. Adding automatic features to your plan is one of the most effective ways to achieve that goal.
If you’re ready to explore how automatic enrollment and escalation can enhance your 401(k) plan, contact us today. Together, we can design a plan that works for you and your employees.
2 https://www2.deloitte.com/us/en/insights/focus/behavioral-economics/overcoming-behavioral-bias-in-retirement-security-planning.html
Securities Disclosure: Securities offered through Valmark Securities, Inc. Member FINRA, SIPC. Investment Advisory Services offered through Valmark Advisers, Inc. a SEC Registered Investment Advisor. | 130 Springside Drive, Suite 300, Akron, OH 44333-2431 | Telephone: (800) 765-5201 | Lebel & Harriman, LLP and Lebel & Harriman Retirement Advisors are separate entities from Valmark Securities, Inc. and Valmark Advisers, Inc.
