How can employees save enough for retirement? Auto-escalation can help.

For many, employer-sponsored retirement plans, such as 401(k) programs, are the primary way to set aside money for post-work life. And as Americans live longer and longer, the onus is on individuals to save for what could be a lengthy retirement.
The question is, how can employees set aside enough to ensure a secure retirement?

A couple of automated tools easily set up by employers could be just the catalysts to start help guiding their workforce down the road toward post-work financial security.

Auto-escalation — where an employee’s 401(k) contributions are automatically increased over time —– is one strategy to consider. The advantage of auto-escalation? The tool can make the potential inertia of participants work in their favor when it comes to saving.

A retirement calculator, such as this one from NerdWallet.com, tells the story when it comes to auto-escalation. The amount needed to save for retirement is daunting, but calculators like these provide some solid data on what’s needed to hit the target. Increased 401(k) contributions — hopefully accompanied by an annual rise in income — can start to help start cut into the gap.

There is data that suggest auto-escalation could be well-received by plan participants. Via Forbes.com, a study from the Transamerica Center for Retirement Studies showed that 71 percent of respondents liked the idea of auto-escalation. Also, via T. Rowe Price, a Pew Charitable Trusts survey recently found that plans with auto-escalation had a higher rate of participants electing to save at least 10 percent via their 401(k) plans. Per the study cited by T. Rowe Price, plans with auto-escalation had 31 percent of their participants saving 10 percent or more. By contrast, 20 percent of participants in non-escalating plans saved 10 percent or more.

Auto-escalation can work hand-in-hand with auto-enrollment, where a firm automatically enrolls its employees into a 401k plan. The question for firms, however, is where to set the contribution level to start. Beginning at a low level —say, three percent — is better than not starting at all, but the risk is that contributions begin low and stay low because of inertia.

For more information on auto-enrollment, auto-escalation and other plan design and employee education questions, contact a Plexus Financial Services client service representative at 847-307-6222, or visit our website at PlexusFs.com.

Disclaimer: Plexus Financial Services does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable; we cannot assure the accuracy or completeness of these materials.

Plexus Financial Services is located at 21805 Field Parkway, Suite 300, Deer Park, Illinois 60010. The company phone number is 847-307-6222.

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