Should You Increase Your 401(k) Contribution Rate Automatically?

During the past 30 years, there has been an important revolution in the management of the 401(k) scheme. Often referred to as auto-increment or auto-escalation, here’s how it works: If you’re automatically enrolled in a plan and don’t opt ​​out of the auto-increment feature, the deferral rate will increase over time, up to the max plan. The frequency, rate of increment, and plan maximum can vary, but the common approach is an annual increment of 1 percentage point on the anniversary of your initial enrollment, up to a maximum of 10%.

According to a study conducted in 2021 by The plan sponsor is the Council of America (Opens in a new tab), More than half of all defined contribution plans have adopted an automatic escalation approach. It’s also becoming increasingly common for plans that include a default automatic raise to increase your rate above what is required to receive the maximum matching employer contribution. For example, a plan that matches 100% contributions up to 6% deferred payment might automatically score you 3% and then increase the rate by 1 percentage point per year until you reach an automatic 10% increase cap.

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