Automatic Escalation

  • An automatic escalation plan increases employee contribution to the retirement plan by automatically increasing the proportion saved from annual salary increments and/or promotions.
  • Automatic escalation overcomes the downsides related to the initial lower contribution rate.
  • Automatic enrollment rates are higher because it overcomes employee inertia and lack of self-control.
  • Automatic enrollment rates are higher because employees do not have to decide how much to contribute because automatic escalation contains a default or standard contribution escalation rate. 
  • Automatic escalation give employees the chance to ‘opt-out,’ but most employees stay enrolled in the plan.
  • When automatically enrolled into pensions, employees tend to stay at the set contribution rate, even when this rate is below the employer match.  Thus, the match alone is not enough to induce higher saving.
  • Most employees fail to take full advantage of the legal maximum contribution limits.
  • While auto-enrollment is benefitting many workers, auto-enrollment alone will not be enough for certain workers to be able to meet savings targets that would provide for sufficient retirement savings. 
  • The introduction of automatic escalation has been shown to result in a significant increase in retirement saving accumulations, especially for low-income workers.
  • Employees, even those who opt out, look favorably at this feature of the pension plan.
  • Nationwide, headquartered in Columbus, Ohio, is one of the largest insurance and financial services companies in the world. The company focuses on domestic property and casualty insurance, life insurance and retirement savings, asset management and strategic investments. 
  • Prior to 2007, Nationwide had typical enrollment provisions. Since 1998, despite considerable communications efforts and provisions such as Easy Enrollment, Nationwide’s active participation rate remained mostly unchanged—between 70% and 75% of eligible associates. Something needed to change.
  • For the past several years, the company learned from its total compensation statements that many associates were not adequately preparing for retirement. Nationwide had considered auto enroll/auto increase for a number of years. Issues such as fiduciary liability and inability to reverse deferrals worked to delay an earlier implementation. The qualified default investment alternative and 90-day revocation5 provisions in the Pension Protection Act (PPA) of 2006 resolved Nationwide’s issues with auto enroll/auto increase.
  • Click here to find out how and why Nationwide's results exceeded their expectations.

Click here to watch University of Chicago professor Richard Thaler discuss the ideas behind "nudging" individual economic behavior.

Click here to go to our Automatic Escalation companion page for your employees.

Click here to go to Lifecycle Asset Allocation, a process for helping employees maximize Automatic Escalation.

About the Financial Literacy Center

The FLC's mission is to develop and test innovative programs to improve financial literacy and promote informed financial decisionmaking.

 

With support from the Social Security Administration, the Center was established in October 2009 by the RAND Corporation, Dartmouth College, and the Wharton School of the University of Pennsylvania in order to develop educational tools and programs that help individuals prepare for their long term financial stability.

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About the Program

Presented by the Financial Literacy Center, a joint center established by the RAND Corporation, Dartmouth College, and the Wharton School of the University of Pennsylvania in order to develop educational tools and programs that help individuals prepare for their long-term financial stability.

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