Auto-escalation is a feature that automatically increases an employee's 401(k) contribution rate by a set percentage, typically 1%, each year until reaching a predetermined maximum, often 15%. This helps employees gradually increase their retirement savings over time, as they near retirement.
Can employees opt out of auto-escalation?
Yes, employees can adjust their contribution rates or opt out of auto-escalation at any time, giving them control over their retirement savings strategy.
How does auto-escalation impact employer matching contributions?
Employers offering matching contributions should consider how auto-escalation interacts with their match formulas. As employee contributions increase, employer matching contributions may also rise, providing greater retirement benefits for employees.
Is auto-escalation mandatory for all 401(k) plans?
Under the SECURE 2.0 Act, auto-escalation is required for 401(k) plans established on or after December 29, 2022, with implementation starting January 1, 2025. These plans must begin with a contribution rate between 3% and 10%, increasing annually by 1% until reaching at least 10% but not exceeding 15%. Businesses in existence for less than three years and those with 10 or fewer employees are exempt from this requirement.
Related Articles