Auto-escalation on the rise in retirement plans

The retirement industry is hopeful that Americans are beginning to save enough for a successful life post-employment, and auto-escalation plays a big part in such optimism.

The auto-escalation movement, which automatically increases the percentage of an employee’s salary that is contributed to a retirement plan, is getting more Americans on track for retirement, says Joleen Workman, assistant vice president in the retirement division of Principal Financial. 

In the last 12-24 months, the move to have plans auto-escalate has picked up significantly, Workman says, surpassing prior years tenfold. In The Principal’s book of business, 40% of clients who use auto-enrollment offer auto-escalation, up from just 9% in 2010. Most of the growth has been in the past 12-18 months.

Vanguard reports similar growth. Of its plans that automatically increased the savings rate by 1%, 68% did so in 2014, compared to just 31% in 2005. Further, in 2014, just 12% of Vanguard plans did not offer any automatic escalation, compared to 25% in 2005.

Auto-escalation is increasing dramatically because employers, who first experimented with auto enrollment, realized employees prefer an employer to do the work for them, Workman explains. “This is one key reason that auto-escalation is taking off,” she says. “Employees are open to it. They prefer it, and it is driving results for [employer] clients.”

Client reaction

Financial advisers who bring up auto-escalation are seeing little pushback from clients because everybody knows that 3% — the most common auto-enrollment starting percentage — is not enough, says Nevin Adams, chief of marketing and communications at the American Retirement Association, formerly known as ASPPA, in Arlington, Va. “One of the easier ways to fix that is to do [auto-escalation],” he says. “It is less financially painful for the worker.”

A 1% annual increase can have a “dramatic and substantial” impact on a retirement plan, says Thomas Parker, managing partner at Vertical Financial Group in Chicago. With annual salary increases for employees, the 1% bump up may not have a major impact on take-home pay, he explains.

When discussing auto-escalation with clients, Parker faces little resistance because “it is a great program and remarkably to me not an administrative nightmare,” he says, which is often the “excuse” employers give for not having auto-escalation in place.

By having all employee plans automatically increase on one day, such as Jan. 1, Parker says it makes the process administratively simple. Adams agrees that if an adviser presents auto-escalation properly, there is little resistance from an employer.

 “We are making progress with advisers seeing best practices and the need to work on higher enrollment and focus on auto-escalation,” Workman, of Des Moines, Iowa-based Principal Financial adds. “With automatic enrollment that increase automatically happens, fighting … inertia, which is the biggest [challenge] in retirement.”

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