Here's why you may be saving more in your 401(k) — and not even know it

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Many employers that sponsor 401(k) plans have adopted “automatic escalation.” The mechanism automatically raises workers’ savings rate over time. 401(k) investors should ideally save at least 15% of their annual pay, according to one financial advisor. Aleksandarnakic | E+ | Getty Images

You may be saving more money for retirement and not even know it.

An increasing share of employers are automating how people save in their company 401(k) plans, in a bid to overcome the inertia that often keeps us from building a nest egg.

“Automatic escalation” — or auto-escalation, for short — is one of those popular mechanisms.

It automatically raises workers’ savings rate each year, often by 1 percentage point at a time up to a cap. The intent is to help boost savings when workers might not take action on their own.

However, the amount of additional money coming out of each paycheck may be indiscernible to many people.

“I have a bet they don’t realize it,” said Ellen Lander, founder of Renaissance Benefit Advisors Group, based in Pearl River, New York.

However, it’s generally a good thing.

In an ideal world, workers would be saving at least 15% of their annual pay in a 401(k) plan, Lander said. This includes both their own contributions and employer contributions like a company match. The ideal rate may fluctuate depending on factors like age and outside savings.

“Philosophically, I think auto-escalation makes perfect sense,” Lander said. “We want people to save as much as they can.”

Automated 401(k) savings is more widespread

Auto-escalation has become more widespread alongside automatic enrollment, which is when employers divert a portion of workers’ paychecks into a 401(k) if they don’t sign up voluntarily.

About 64% of companies with a 401(k) plan automatically enrolled workers in 2022, according to an annual survey by the Plan Sponsor Council of America, a trade group.

Of those companies, 78% also automatically increased workers’ savings, up from 65% in 2013, according to the poll.

Most, or 84%, of these 401(k) plans raise workers’ savings rate by 1 percentage point a year.

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Here’s a basic

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The full article is available here. This article was published at CNBC Finance.