Certified Plan Sponsor Professional (CPSP) Practice Exam

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What is the purpose of automatic escalation of elective deferrals in a 401(k) plan?

To reduce administrative costs
To increase deferral rates over time without revisiting elections
To ensure participants do not invest at all
To provide a fixed contribution rate

The correct answer is: To increase deferral rates over time without revisiting elections

The primary purpose of automatic escalation of elective deferrals in a 401(k) plan is to increase deferral rates over time without requiring participants to revisit and manually adjust their contribution elections. This feature is designed to help employees save more for retirement gradually, as many individuals may not actively increase their contributions despite recommendations to do so. With automatic escalation, the contribution rate automatically increases at predetermined intervals, often annually, which helps participants build their retirement savings effectively. As individuals tend to forget to update their contributions or may feel uncertain about how much to defer, this mechanism encourages a higher savings rate and promotes better financial habits over time. This approach addresses common behavioral tendencies related to savings, making it easier for participants to enhance their retirement readiness without needing to take additional actions themselves, thus aligning with the goal of fostering greater retirement security.