By Chris Cristallo, CFP® | BEAM/BGA 401k
Summer is in full swing. Whether you are headed to the beach, the mountains, or just enjoying longer days and warmer evenings, the last thing most people are thinking about is their 401(k). But while you’re out enjoying the sunshine, the right retirement plan design can be quietly working in the background, helping employees save more effectively and helping employers build a better plan.
Two features that are making a big difference in retirement outcomes are automatic enrollment and auto-escalation. These aren’t just buzzwords; they’re powerful tools that can improve participation rates, boost savings, and simplify decision-making for everyone involved.
Let’s break down why these features deserve a spot in your 401(k) plan lineup.
1. Automatic Enrollment
Automatic enrollment means new employees are enrolled in the 401(k) plan by default, often at a modest deferral rate like 3% or 6%, unless they actively choose to opt out.
Why it works:
- Minimizes hesitation. Behavioral finance teaches us that people are more likely to stick with the default option, even when that option is saving for retirement.
- Boosts participation. Plans with auto-enrollment see participation rates jump from the national average of around 50% to upwards of 85% or higher.
- Improves retirement readiness. The sooner someone starts saving, the more time their money has to grow. Automatic enrollment makes that first step effortless.
Employers love that it simplifies onboarding and shows you are serious about employee financial wellness. For safe harbor or top-heavy plans, it can also help satisfy testing requirements by broadening participation across employee groups.
2. Auto-Escalation
Auto-escalation is the natural partner to automatic enrollment. It means an employee’s deferral rate increases automatically over time—usually by 1% each year—until it hits a cap (like 10% or 15%).
Why it works:
- Encourages better savings behavior. Employees often start low out of caution, but auto-escalation nudges them toward more optimal savings levels without requiring them to take action.
- Adjusts with income. Because increases are typically timed with annual raises, most people don’t feel the pinch in their take-home pay.
- Improves long-term outcomes. Studies show that employees who are automatically enrolled and escalated are more likely to reach target retirement savings goals.
Auto-Escalation helps meet fiduciary goals by promoting better outcomes. And if your plan includes employer matching, higher deferrals mean more employees are taking full advantage of the match, which further boosts morale and benefits satisfaction.
3. Why Auto Features Work Better Together
Auto-enrollment and auto-escalation are most effective when implemented together. Each feature delivers value on its own, but together, they create a stronger foundation for long-term retirement readiness. When used as part of a well-structured plan design, they:
- Increase overall participation and contribution rates
- Support a more financially prepared and confident workforce
- Streamline administrative tasks for HR and payroll teams
- Improve nondiscrimination testing outcomes for highly compensated employees
And with the SECURE Act 2.0, many new plans are now required to include these features—starting in 2025 for most plans established after December 2022. That means there’s never been a better time to review your current setup and get ahead of the curve.
4. Tips for Making Auto Features Work for Your Team
- Communicate clearly. Auto-enrollment and escalation should never feel sneaky. Explain the benefits in onboarding and through ongoing plan education.
- Start higher if you can. Consider a default deferral rate of 6% or more—studies show employees are unlikely to opt out even at higher starting points.
- Set a generous cap. Auto-escalation is more powerful when it maxes out at 10%–15%, not just 6%.
- Use re-enrollment annually. Each year, you can re-enroll eligible non-participants to encourage them to join or rejoin the plan.
Let the Plan Do the Work
Summer is a time for relaxing, recharging, and maybe even forgetting what day of the week it is. But retirement never takes a vacation. By incorporating automatic enrollment and auto-escalation into your 401(k) plan, you can help your employees make progress even when they are not paying attention.
Good plan design should make it easier for people to do the right thing. These features strike the perfect balance: they remove barriers, build momentum, and set your team on a solid path to financial independence.
We are here to help.
Reach out to us today to schedule a complimentary 401(k) plan review.
Let us help you build a retirement plan that grows stronger with every season.
Together, let’s elevate the way we approach retirement programs.
Christopher A. Cristallo, MBA, CFP®
Qualified Retirement Plan Advisor