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Auto-escalation use in 401(k) plans too low, Northern Trust report finds

The adoption rate of auto escalation by 401(k) plans is too low at 32%, said a report issued Monday by Northern Trust Asset Management.

“There is plenty of room for improvement,” Susan Czochara, a senior product manager for the retirement solutions unit of Northern Trust Asset Management, said in an interview. She recommended that the auto-escalation adoption rate at least match the 52% adoption rate of auto enrollment by 401(k) plans.

For the best impact on participants' contributions, the two auto features “need to work in tandem,” Ms. Czochara said.

“Plan participants are still not effectively challenged to save,” said the Northern Trust report, which is based on a survey of 103 DC plan executives, 1,001 plan participants, and 13 experts such as consultants and record keepers.

Despite the low adoption rate, 66% of participants whose plans lack an auto-escalation feature said “they would likely accept the automatic annual increase,” the report said.

The report also noted that 46% of plans place a cap of 8% or less of a participant's annual pay for the combined use of auto enrollment and auto escalation. “Experts suggest an effective ceiling would be 12% to 15%, depending on workforce characteristics and plan design,” the report said.

Ms. Czochara said those higher goals could be better achieved if DC plans raised the initial auto-enrollment deferral rate beyond the traditional 3% of annual pay. The survey found that 51% of plans set an initial rate at 3% or less; 35% set a rate of 4% to 7%; and 11% offered a rate of 8% or more. The remaining 3% did not know their initial deferral rate.

The online survey was conducted in April and May by Greenwald & Associates for Northern Trust. The survey wasn't restricted to Northern Trust clients.