Automating saving

Most participants understand the importance of saving for retirement, but life and inertia often get in the way. Adding automatic plan features, such as automatic enrollment, contribution escalation, and investment selection, can help put inertia to work for them.

Automatic enrollment in 401(k) plans

People can’t save if they’re not participating in your retirement plan. Automatic enrollment (auto-enroll) gets them in the plan. And once in, they generally stay there.

How it works: Eligible employees are automatically enrolled at a default contribution rate, unless they actively opt out. You’ll need to consider a default rate that will help them build their savings without straining their budgets. Historically, many plan sponsors have chosen 3%, but it’s now widely accepted that this rate may be too low. That’s because auto-enrolled participants may not change their contribution rate, and 3% probably won’t help get them where they need to be. For this reason, you might consider a higher default or pairing automatic enrollment with contribution escalation, which we’ll look at in a moment. 

Potential benefit: Auto-enroll can help improve participation rates. 

Key considerations:

• What’s a suitable default rate for your plan?
• How would using auto-enroll affect your matching contributions?
• Do you want to auto-enroll only newly eligible employees or all nonparticipants?
• Should you use compensation to determine an appropriate default contribution for each participant: pretax or Roth?

Automatic contribution escalation

Getting participants into your plan is just the first step. Pairing it with automatic contribution escalation (auto-increase) can help take their saving to the next level.

How it works: Participants’ contribution rates generally increase by 1% each year up to a predetermined limit, such as 10%. You might consider timing the increase with annual pay raises to help lessen the impact on take-home pay and potentially minimize the number of people who opt out.    

Potential benefit: The combination of auto-enroll and auto-increase can help improve retirement readiness.

Key considerations:

• What’s a suitable annual increase and overall limit for your plan?
• Should you make auto-increase an optional feature that participants can select or a plan default where they have to opt out?
• Will auto-increase apply just to newly eligible employees or all participants?
• Should you extend the auto-increase threshold to include catch-up contributions for eligible participants?³

Automated investment selection

Slightly more than half of workers¹ have limited investment knowledge, so choosing investments that align with their retirement goals can be a challenge. They may simply choose the same investments as their friends, multiple target-date funds, or the plan’s stable value option. Automated investment selection (auto-invest) can help make the decision-making process easier.

How it works: If a participant doesn’t make their own investment election during enrollment, you, as the plan fiduciary, can select a predetermined (or default) investment option for their contributions. While any fund can be a default investment option, plan sponsors often choose a target-date fund, balanced fund, managed account, or some combination. That’s because these options can be used as a qualified default investment alternative (QDIA), which can help limit your fiduciary risk.  

Potential benefit: Auto-invest can help improve your participants’ asset allocation, which may help boost their investment results over the long term—strengthening their financial well-being.     

Key considerations:

• Which default investment makes the most sense for your plan?
• Will auto-invest apply only to participants who are auto-enrolled?
• Do you want to use a QDIA as your default?
• Would a dynamic QDIA be suitable for your workforce?

Enhancing saving opportunities

In addition to the auto features, you may want to consider these design options to help encourage participants to save more:

• Stretch match—Participants generally contribute enough to receive the plan’s matching contribution. Restructuring the match formula can be a simple way to help boost contribution rates while keeping the employer contribution the same.
• Mega backdoor Roth 401(k)—If you offer a Roth 401(k), you can amend your plan document to permit in-plan Roth rollovers, which can help your highly compensated employees max out their savings each year. Given the complexity of this feature and pending proposals in Congress, make sure you include your plan’s financial professional, recordkeeper, and third-party administrator (TPA) in any discussions.  

Reducing plan leakage

On average, 10% of participants have at least one outstanding loan.⁵ To help optimize retirement outcomes, it’s crucial for participants to stay invested. Each time they take money out of their account—even for valid reasons—it can push their retirement goals further out of reach. Ensure your plan design promotes responsible saving behaviors while still providing access. 

• Offer loans with guardrails 
• Review your hardship withdrawal provisions
• Consider offering emergency savings accounts outside the plan   

Tap into the experience of your plan partners

Designing a plan that seeks to drive better outcomes can be complicated. Fortunately, you have a team of specialists who can help guide your retirement committee through the process. Your plan’s financial professional, recordkeeper, and TPA can generally assist with:

• Evaluating different features based on your workplace demographics
• Running scenarios to see the potential impact on projected retirement readiness
• Analyzing the effect on your plan’s fees and expenses

Engaging them in the conversation also ensures they can support the features you’re considering.

Embrace the power of retirement plan design

Education is one key to helping participants save enough to enjoy a comfortable retirement. So is plan design. Make sure yours is sending the right message to help your participants get and stay on track.    

1 In June 2024, John Hancock commissioned our 10th annual financial resilience and longevity survey with the respected research firm Edelman Public Relations Worldwide Canada (Edelman). An online survey of 2,623 John Hancock plan participants was conducted between 5/17/24 and 6/3/24 and 525 retired Americans, sourced through Angus Reid’s research panel, was conducted between 5/13/24 and 5/28/24. The objectives of the study were to learn more about individual stress levels, their causes and effects, strategies for relief, and to provide custom insights around how retirees are faring in retirement. John Hancock and Edelman are not affiliated, and neither is responsible for the liabilities of the other. 2 John Hancock internal data as of 11/30/24; plans with more than $30 million in assets. 3 Individuals over the age of 50 are eligible to make a catch-up contribution of $7,500. Based on the IRS 2025 retirement plan limitations, which are subject to change. Under SECURE 2.0, individuals who are age 60, 61, 62, or 63 at the end of the calendar year are eligible to make an increased catch-up contribution of $11,250 in 2025. 4 “2024 PLANSPONSOR Defined Contribution Plan Industry Report: 401(k) Plans,” Asset International, a division of ISS STOXX, © 1989–2024. 5 John Hancock internal data based on active open-architecture plans as of 6/30/24.