Welcome back to our ongoing series dedicated to you, the retirement plan sponsor, and your employees. Today we’re going to continue to focus on automatic features and discuss an option that can supercharge your employees’ savings over time.
In the last two videos, we talked about automatic enrollment and automatic QDIA. Let’s assume these features are being used and you’ve helped your employees enroll into the plan with a prudently-managed investment option. This has all been automated, and the employee has had to do nothing up to this point.
The next step is enhancing the plan design to help them increase their savings over time. In our book, we share a simple mantra: 10-1-NOW. 10 stands for employees needing to save 10% of their income, on average. In many cases, employees just can’t save 10% if they’re currently saving nothing.
So, we tell them to save what they can at least up to the company’s match so you don’t have any free money left on the table. Then, each year, simply increase your annual savings by 1% until you get up to 10% and do it now. 10-1-NOW.
Simple, right? Except the majority of employees never increase their contributions by 1%. In the chart on page 38 of our book, you will see this example: George and Morgan both start contributing at 5%. Each year, George increases his contribution by 1% until he is at 10% and Morgan keeps contributing 5% each year. You will see a staggering difference of almost $200,000 in savings over 35 years.
Why don’t all participants do it? Because humans are creatures of habit. Left to their own devices, employees just forget to do it. That’s why you must do it for them. Auto-escalation makes it happen and makes it easier for you to implement. Each year, you simply send out a 30-day notice notifying employees that if you don’t hear from them otherwise, you will be increasing their 401(k) contribution by 1%. Your record keeper can even automate this process.
The results are overwhelming. 70% or more of employees will do the increase. If you’re ready to take action and maximize your 401(k) plan, give me a call and let’s schedule a meeting to discuss how we can best serve you. I hope to hear from you soon.