Why you may be saving more in your 401(k) — and not even know it

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You may be saving more money for retirement — and not even know it.

An increasing share of employers are automating how people save in their company 401(k) plans, in a bid to overcome the inertia that often keeps us from building a nest egg.

“Automatic escalation” — or auto-escalation, for short — is one of those popular mechanisms.

It automatically raises workers’ savings rate each year, often by 1 percentage point at a time up to a cap. The intent is to help boost savings when workers might not take action on their own.

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However, the amount of additional money coming out of each paycheck may be indiscernible to many people.

“I have a bet they don’t realize it,” said Ellen Lander, founder of Renaissance Benefit Advisors Group, based in Pearl River, New York.

However, it’s generally a good thing.

In an ideal world, workers would be saving at least 15% of their annual pay in a 401(k) plan, Lander said. This includes both their own contributions and employer contributions like a company match; the ideal rate may fluctuate depending on factors like age and outside savings.

“Philosophically, I think auto-escalation makes perfect sense,” Lander said. “We want people to save as much as they can.”

Automated 401(k) savings is more widespread

So-called auto-escalation has become more widespread alongside automatic enrollment. Auto-enrollment is when employers divert a portion of workers’ paychecks into a 401(k) if they don’t sign up voluntarily.

About 64% of companies with a 401(k) plan automatically enrolled workers in 2022, according to an annual survey by the Plan Sponsor Council of America, a trade group.

Of those companies, 78% also automatically increased workers’ savings, up from 65% in 2013, according to the poll.

Most, 84%, of these 401(k) plans raise workers’ savings rate by 1 percentage point a year.

Here’s a basic illustration of how it works: Let’s say a worker earns $75,000 a year, contributes 6% of their annual salary to a 401(k), and is paid twice a month. This person saves $4,500 a year, or $187.50 per paycheck.

Raising the savings rate to 7% brings annual savings to $5,250, or $218.75 per pay cycle — amounting to just $31.25 more per paycheck.

(This example doesn’t account for additional financial factors like taxes or annual pay increases.)

Employees can opt out of the arrangement. Employers are also obligated to send a notice to workers communicating that they are being automatically enrolled into a 401(k) and their savings rate will be increased, but such communiques may go unnoticed.

Many companies are hesitant to add auto-escalation altogether because they fear it may be “onerous” and place too much of a financial burden on some workers, Lander said.

Among 401(k) plans that use automatic enrollment, just 40% automatically escalate savings for all workers, according to PSCA data. About 12% do so only for investors who are “under-contributing”; 26% make escalation a voluntary choice for workers and 22% don’t offer it at all.

The vast majority of 401(k) plans don’t automatically raise savings beyond a cap, and nearly two-thirds (63%) limit those automated worker contributions to 10% or less of annual pay.

Of course, reaching the cap doesn’t necessarily mean workers are saving enough. Workers can voluntarily set their savings rate higher.