Auto-Features Offer Advantages for Plan Participants, Employers

Automated features drive advantageous outcomes for both participants and employers, but employers often hesitate to implement them because of the perceived costs, according to Principal Financial Group’s “Smart Ideas to Help Fund Automated Features, Part II: Looking Beyond the Retirement Plan.”  

Despite that perception, Principal cautioned that employers should consider the cost of not adding automated features to their plans.

“Every employee will eventually reach a point when they are physically, mentally, and/or emotionally ready to retire,” stated Principal in the article published in August. “But if they are financially incapable of doing so because they didn’t save enough for retirement, productivity can drop. At the same time, total compensation typically continues to grow, outpacing productivity and creating a cost of delayed retirement.”

Today, more than half of defined contribution retirement plans have adopted automatic enrollment: According to NEPC’s 2024 Annual Plan Trends & Fee Survey, released in March, 54% of DC plans used auto-enrollment and 59% offered auto-escalation.

Similarly, the 2025 PLANSPONSOR Plan Benchmarking Report found that 47.1% of plan sponsors offered automatic enrollment and 39.3% offer some kind of auto-escalation. Proprietary data from Principal showed that as of year-end 2024, automated features led to a 37% higher plan participation rate and made plans twice as likely to have participation rates of at least 90%.

“Starting early and saving enough are the most powerful drivers of retirement success, and auto-enrollment and [auto-]escalation make both happen seamlessly,” wrote Mikaylee O’Connor, principal in and head of DC solutions at NEPC LLC, in a response to emailed questions. “These features remove friction, boost participation and lead to more financially secure employees—translating into higher productivity, engagement and satisfaction.”

Looking Within the Budget

Olivia Mitchell, a professor at the Wharton School of the University of Pennsylvania, wrote to PLANADVISER that employers can fund auto-features by reallocating existing dollars rather than increasing budgets.

“Stretching the match formula—say, matching 50% of up to 6% contributed, instead of 100% of 3%—can encourage higher saving without raising total costs,” wrote Mitchell.

Principal’s earlier “Smart Ideas to Help Fund Automated Features Part I: Looking Within the Retirement Plan,” published in August, recommended employers also consider capping their match.

“Set a maximum dollar amount … for matching contributions,” Principal’s article stated. “This reallocates a portion of [the] match from highly compensated employees (those most likely to hit the cap), which can then be used to help fund auto-enrollment and auto-increase for the broader workforce.”

In addition, Principal’s article stated that companies can consider adjusting their match contributions based on other considerations and goals, such as tenure. Small decreases to matches for employees in lower service tiers can be used to fund increases for employees with more tenure.

The firm also suggested employers reallocate a portion of alternative retirement contributions, such as non-elective contributions and profit-sharing, to fund automated features.

Looking Outside of the Budget

NEPC’s O’Connor wrote to PLANADVISER that in addition to adjusting allocations within the retirement budget, plan sponsors might also consider integrating health care and retirement into a single benefits strategy. Opportunities often exist in health care to reduce costs by revisiting plan design and better understanding current fee arrangements—potentially leading to renegotiations or better alignment of overall incentives, O’Connor explained.

For health plan design, sponsors can evaluate options such as offering high-deductible plans instead of preferred provider organizations, O’Connor wrote. Fee reviews can include examining provider fee transparency—potentially revealing opaque incentives or compensation structures—and assessing payment accuracy, as a significant portion of payments are often miscalculated.

“The economist in me simply says to view [auto-features] as part of your overall compensation policy and avoid the temptation to engage in inefficient mental accounting where salary, savings, health care, vacation, etc. are treated as different buckets,” wrote Jeff Brown, a finance professor at the University of Illinois. “They are all part of an overall compensation package and should be treated as such.”

Wharton’s Mitchell wrote to PLANADVISER with another point: In some cases, sponsors can also tap communications or wellness budgets to support employee education about automatic features.

Principal’s “Part II”  article also recommended that plan sponsors leverage tax credits, such as those made available through the SECURE 2.0 Act of 2022, that offset startup and auto-enrollment costs for small employers. Businesses with up to 100 employees can claim a tax credit of $500 per year for three years to cover plan startup costs, including the implementation of automatic enrollment. An additional credit of up to $5,000 per year is available for new plans, based on employer contributions.

Additionally, employers can review their bonus configuration and redirect funds toward covering the cost of automated features, Principal suggested. Short-term bonus dollars can be converted into potential long-term financial security for employees.

Principal’s final outside-the-budget suggestion was to scale back on less-utilized perks, such as free lunches and gym memberships, and consider redirecting those dollars toward financing automatic features.

“It’s not about taking something away but about aligning resources with what has the opportunity to support employees’ futures most effectively,” the article stated.

The ‘Next Frontier’

According to Mitchell, automatic features and default annuity options—of which she is a proponent—share a common principle: “People tend to stick with the default.”

“Making partial annuitization the default payout could help retirees convert their savings easily into steady income and manage longevity risk,” Mitchell wrote to PLANADVISER. “In short, automation of both the accumulation and decumulation phases translates behavioral insights into practical plan design, improving outcomes without imposing burdens on employees or employers.”

O’Connor sees another opportunity in the auto-feature space.

“The next frontier is auto-distribution, creating a paycheck-like experience for retirees,” wrote O’Connor. “This keeps assets in the plan while simplifying income delivery—a win-win for sponsors and participants.”