Apr 29 2014, 1:50pm CDT | by Forbes
If you’re not saving to the max in your 401(k), there’s an easy way to get there: sign up for an annual increase program. “For those who are in it, it’s working,” says Jeanne Thompson, a vice president at Fidelity Investments who tracks 401(k) trends. “Even though the percentage of employees who use it is small, it’s actually driving a large percentage of savings increases.”
Over the last 12 months, one in five employees increased their 401(k) personal savings rate–the highest percentage since Fidelity started tracking the number seven years ago. And nearly 2 in 5 savings rate increases were done via an annual increase program (also known as auto escalation). For Millenials, there was an even bigger impact: More than half of savings rate increases were done via an annual increase program.
It’s likely your 401(k) plan has this feature. Three-quarters of Fidelity-administered 401(k) plans offer annual increase programs. It works two ways—employer driven or employee driven. In the employer driven model (12% of plans) the employer automatically enrolls everyone in the annual increase program. (Only 7% of employees enrolled by their employer opt out.) In the employee driven model, the employer offers an annual increase program, but it’s up to the employee to go online or call to sign up.
When you sign up, the amount you contribute in salary deferrals to your 401(k) plan goes up by 1 percentage point a year. So if you’re saving 4% of your salary this year, next year your savings rate is bumped up to 5%, and so on until you get to 10% or 15%. You can set the cap, and if your employer sets a cap, you can modify it. The contribution limit for 2014 is $17,500, or $23,000 if you’re 50 or older.
If you’re deferring at 3% and your employer offers this program, you should sign up for it, Thompson says, adding that a 3% savings rate isn’t going to be enough to supplement your retirement, even if your employer contributes to your 401(k) by matching your savings. Fidelity recommends that people save 10 to 15% of pay; at a minimum, save up to the employer match. The average employer match is 4.5%. Some employers match 100% of the first 3% of employee salary deferrals, and others match 50% on 6%, meaning you have to defer 6% of pay to get the full employer match. “A lot of employers are taking that strategy to increase employee savings rates,” Thompson says.
Note that the annual increase programs are separate from automatic enrollment programs, where your employer automatically enrolls you in a 401(k)—often at a low 3% savings rate–unless you opt out. Automatic enrollment is done by 26% of plans but covers 56% of participants because it’s in most part large plans that implement it. Of those plans that automatically enroll employees, less than half (46%) have annual increase programs. That can leave employees stuck saving too little.
If your plan doesn’t offer annual increases, make a point of revisiting your savings rate during annual enrollment when you sign up for other employee benefits programs like medical and dental insurance. In most plans you can contact your 401(k) administrator at any time during the year and reset your contribution rate.
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