Auto-escalation is another way you can encourage investment in your 401(k) plan and help your employees put their money to work.
With auto-escalation, employees’ 401(k) withholding amount goes up by one percentage point per year until reaching the maximum of 10%.
Auto-enrollment and auto-escalation typically go hand in hand. Together, they maximize participation and ensure employees who stick with you are getting the most value from their retirement benefits.
There’s a caveat:
To do auto-escalation right, you must run a tight ship.
Implementing auto-escalation badly can be worse than not having it at all.
With the right policies and processes in place, you can ensure auto-escalation isn’t more complicated than it should be. A handful of common mistakes are responsible for most of the auto-escalation issues that show up on an audit:
The biggest issue is simply forgetting to input escalations on time—or at all.
If employees have signed up for auto-escalation and fail to receive it, you will be required to make things right with your own money.
Once auto-escalation becomes part of your core business practices, it’s much harder to forget about it. Luckily, one small change you can make any time takes most of the mystery out of auto escalation.
Auto-escalation hinges on the anniversary date when the 1% increase is instituted. As the name implies, this traditionally falls on the day that an employee joined your company.
But that’s the worst way to do it.
Individual anniversary dates add unpredictability and the potential for human error. In a large enough enterprise, you may have anniversary dates every day of the year. Overlooking even one is a problem.
Standardize anniversary dates by updating auto-escalation for everyone on January 1. There’ll be much less to overlook—and your audit professional will thank you by not having deferral rate changes mid-year.
Some companies forgo auto-escalation even once auto-enrollment is in place. They worry about potential financial consequences of oversights or miscommunication. Clarifying your 401(k) policies protects you from these negative outcomes while boosting the value your plan offers to personnel.
Contact Cassell Plan Audits today for more information.
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