When 401(k) auto-features like automatic enrollment, automatic deferrals, and automatic escalation first emerged, they seemed like a total game-changer.
Research shows these features can increase participation dramatically—by over 15 percentage points on average. And the gains are the biggest among lower income and minority workers who can benefit most.
Auto-features are doing their job on participation, but experts warn against getting complacent, especially as 30-50% more young and lower-paid workers enroll. To maximize the value of your auto 401(k) while avoiding higher-than-expected costs, you need an ongoing system to monitor and optimize these settings. Here’s what to focus on:
Fine Tune Deferral Rates to Participants’ Reality
The power of auto-features comes from making enrollment and savings decisions automatically. But that means participants stay enrolled at the default rates unless they opt out, so setting appropriate deferral percentages upfront is key.
Aim higher than the common 3% default rate, which barely moves the needle on retirement savings. But don’t go so high or escalate so quickly that participants struggle financially. Deferral rates are absorbed directly from participants’ take-home pay. Increasing them too quickly could mean pay increases barely boost their checks or even leave them worse off.
Ideally, aim for a 6-10% deferral rate between automatic and matched contributions. If most participants in your plan are young or lower income, start conservatively at 6% rather than 10%.
To identify the sweet spot, model different scenarios using your plan census data. Look at the impact on take home pay for representative ‘average’ participants. If too many employees start opting out or tapping 401(k) funds for non-retirement needs, like loans or hardship withdrawals, reassess your rates.
Add Emergency Savings to Avoid 401(k) Raids
Speaking of non-retirement withdrawals—try to minimize these by meeting more immediate savings needs directly. Accounts like emergency savings and rainy-day funds allow participants to stash cash for surprise expenses. If integrated into the 401(k), these supplementary savings options prevent pre-retirement asset leakage.
In one study, automatically enrolled participants were far more likely to fully cash out when changing jobs compared to those who voluntarily enrolled. While auto-features still increase net wealth overall, cash-outs chip away at that advantage. Giving participants other options reduces this behavior.
Emergency and supplemental savings accounts also address a root cause—some employees enroll more to access affordable savings than for retirement itself. Better positioning 401(k)s as long-term wealth while offering other shorter-term savings options keeps roles distinct.
Review Cost Impact—And Have a Backup Plan
The stellar participation gains from auto-enrollment don’t come free. As 30-50% more lower-paid employees join your 401(k) and start accruing matches, plan costs rise. Model out your unique participant mix to see how costs could jump under different match structures.
Let’s say you currently match 50% of the first 6% of pay deferred at a $0.50 on the dollar rate. If auto-features will realistically bring participation to 95% of staff, estimate total matching contribution costs in that scenario. Then consider changes like lowering the matching rate or capping the match at a percentage of total payroll.
The goal is to avoid a situation where you need to roll back matches later on. Think through the options and have a backup plan if the participant or cost growth exceeds projections. The maximum tax benefits employers get from 401(k)s also depend partly on participation rates—so there are financial incentives on both sides to get this right.
Automate Monitoring With Annual Reviews
Rather than manually tracking participation fluxes after launching auto-features, use your record-keeper’s systems to automate oversight. Most can generate periodic reports, say monthly or quarterly, showing updated statistics. Look for changes in:

Overall participation rates: Is growth aligned with projections?
Deferral rates: Is the average creeping up or down significantly?
Non-retirement plan usage: Are loans and hardship withdrawals rising?

Then conduct formal reviews annually using fresh census data. Revisit deferral rates and escalation schedules in case resets better match current salaries or hiring. Adjust contribution limits if too many higher-paid staff bump against the annual additions cap prematurely.
Ongoing reviews ensure your qualifications and testing results remain sound. Waiting longer between check-ins raises the risk of surprises—like unexpectedly low average deferral rates among non-highly compensated employees. The sooner potential issues arise, the more flexibility there is to tweak plan settings.
Help Participants Understand Their Role
For all their advantages, auto-features do enable a more passive participant experience. Employers can counteract potential disengagement through smart messaging about why and how retirement savings matter.
Communicate the key steps participants make by staying enrolled. Show compound growth over 30+ years in easy-to-understand projections. Break down how much deferrals plus employer contributions could meaningfully fund retirement—perhaps 70% or more of needed income. Position savings as wealth escalators that self-propel over time through market returns and compounding.
These types of messages reinforce retirement readiness as a journey requiring long-term commitment. They frame 401(k) balances less like bank accounts to dip into. When participants understand their growing ownership stake, they engage more.
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Copyright © 2024 Smarts Publishing. This is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.