Auto-Enrollment & Auto-Escalation: Maximize Retirement Benefits

Meeting Compliance and Improving Engagement Simultaneously

Managing retirement plans means grappling with the dual challenge of ensuring compliance with legislative mandates and fostering employee participation. Auto-enrollment and auto-escalation are two strategic tools that can effectively address both aspects, making the lives of employers and HR professionals a bit easier.

Understanding Auto-Enrollment

Auto-enrollment is a process that automatically enrolls eligible employees in a retirement plan, typically starting their contributions at about 3-6% of their salary. This feature leverages behavioral economics by combating procrastination and hesitation, often significant barriers to retirement savings. Employees are more likely to save consistently when the process is automatic, helping them capture any employer-matching dollars available. Importantly, employees maintain full control to opt-out or adjust their contributions to better fit their financial circumstances.

The Advantages of Auto-Escalation

Auto-escalation complements auto-enrollment by automatically increasing employee contributions at regular intervals, usually by 1% annually, until reaching a defined cap of 10-15%. This aligns well with typical income growth, helping employees to increase their savings without needing to make manual updates. As a result, auto-escalation effectively supports long-term savings goals, offering a seamless way to ensure that employees continue to prepare adequately for retirement.

Ensuring Compliance with the 2025 Mandate

Regulatory compliance is a driving force behind the adoption of these features. As of December 29, 2022, businesses establishing new plans must comply with a mandate to offer auto-enrollment, starting contributions between 3-10% and increasing them annually until reaching 10-15%. There are exemptions for businesses less than three years old or with 10 or fewer employees, offering room for growth before compliance is necessary. Furthermore, tax credits up to $5,000 per year for three years may be available, alleviating the financial burden of implementing these changes while reducing compliance risks.

A Strategic Approach to Retirement Planning

Auto-enrollment and auto-escalation provide more than administrative ease; they are strategic enhancements that support employees and reduce compliance burdens. For plan sponsors, these features are a win-win, facilitating retirement readiness for their workforce while assuring adherence to the latest legislation. Employers are encouraged to consult with their plan advisors or retirement plan providers to evaluate their current strategies and consider integrating these valuable features to maximize benefits for all involved.