Why you might be saving more in your 401(k) — but you don’t know it

Alexander Danakic | Electronic+ | Getty Images

You might be saving more for retirement and not even know it.

More and more employers are automating the way people save in company 401(k) plans to overcome the inertia that often prevents us from accumulating savings.

“Auto-upgrade” (referred to as auto-upgrade) is one of the popular mechanisms.

It automatically increases workers’ savings rates each year, usually by 1 percentage point at a time, until a cap is reached. The aim is to help increase savings at a time when workers may not be able to take action themselves.

Allison Schrager says 401(k) doesn't seem to have the same backers as Social Security

However, for many people, the extra income that comes with each paycheck can be imperceptible.

“I bet they don’t realize it,” said Alan Rand, founder of Renaissance Benefit Consultants Group, based in Pearl River, New York.

However, this is usually a good thing.

Rand said that ideally, workers should save at least 15% of their annual salary into a 401(k) plan. This includes their own contributions and employer contributions, such as a company match. The ideal interest rate can fluctuate based on factors such as age and outside savings.

“Philosophically, I think automatic upgrades make perfect sense,” Rand said. “We want people to save as much as possible.”

Automatic 401(k) savings more common

Auto-escalation has become more common along with auto-enrollment, whereby employers transfer a portion of an employee’s salary into a 401(k) plan if they do not voluntarily enroll.

About 64% of 401(k) plan companies will automatically recruit employees in 2022, according to an annual survey by the American Council of Plan Sponsors, an industry group.

Of these companies, 78% have also automatically increased their employees’ savings, up from 65% in 2013, the survey showed.

The majority of these 401(k) plans, or 84%, increase workers’ savings rates by 1 percentage point per year.

Here’s a basic explanation of how it works: Let’s say a worker makes $75,000 a year, saves 6% of his annual salary into a 401(k) plan, and gets paid twice a month. This person saves $4,500 per year, or $187.50 per paycheck.

Increasing the savings rate to 7% saves $5,250 per year, or $218.75 per pay period, which equates to just $31.25 per paycheck.

(This example does not take into account other financial factors such as taxes or annual salary increases.)

Employees can opt out of this arrangement. Employers are also obligated to send notices to workers that they will be automatically enrolled in a 401(k) and that their savings rate will increase, but such communiqués may be ignored.

Rand said many companies are hesitant to fully add automatic upgrades because they worry it could be “onerous” and place too great a financial burden on some employees.

According to the American Council of Plan Sponsors, only 40% of 401(k) plans that use automatic enrollment automatically increase savings for all employees. About 12% of investors do this only to “under-capitalized” investors. 26% of respondents offer upgrades as a voluntary option for employees, while 22% do not offer this option at all.

The vast majority of 401(k) plans do not automatically increase savings above a cap, and nearly two-thirds, or 63%, limit these automatic employee contributions to 10% of annual salary or less.

Of course, hitting the cap doesn’t necessarily mean workers are saving enough. Workers can voluntarily increase their savings rate.