Nyhart Inc., an actuary and employee benefits consultant, recently conducted a six-month study reviewing nearly 10,000 participant retirement accounts at 110 public and private companies. Not surprisingly, this study, like so many others, found that participants are tragically under prepared to retire.
According to the study, today’s average participant [relying solely on their 401(k)] will not have adequate savings to retire at age 65. In fact, now it is estimated to take until the age of 73 to accumulate ample savings to live securely in their golden years.
A study by Wells Fargo revealed a perplexing outlook concerning participant’s confidence in their ability to retire comfortably. Of those in their 50s, 56% were “confident or very confident” they will have the means to support the lifestyle they wish in retirement. Unfortunately, the facts don’t support their perspective. The median retirement savings of those respondents was just $29,000.
Shouldn’t Americans have realized by now that saving for retirement is a DIY undertaking? Additionally, we are seeing more and more workers who are skeptical of Social Security’s ability able to provide for them through retirement. According to the Wells Fargo study, only 40% of those surveyed believe Social Security will be available throughout their retirement. So why don’t participants save more? Wells Fargo’s Laurie Nordquist, Executive Vice-President and Director of Institutional and Trust Services, got it right when she observe, “Too many Americans have their heads in the sand in the face of obvious savings deficits.”
Increasing a participant’s contribution rate is the obvious place to start. Individual deferrals are the single most powerful factor in determining financial success in retirement. As well, individual deferrals are generally within one’s power to control. While younger workers obviously have a better shot of being able to address their retirement savings challenges, nearly 70% of them run the risk of needing to defer retirement at their current level of savings, according to Nyhart. The study found that the number of workers under 30 who would be able to retire at 65 would double if they simply increased their deferrals by 4%.
For many older participants that have failed to save adequately during their working years, increased savings may be too little too late. The Nyhart survey found that many of those ages 55 and above would need to contribute over 45% of their income to retire in 10 years. For workers between 45 and 55, contributions would need to average 19% of their income to retire by 65. These savings rates are hardly realistic for the typical employee. Then again, perhaps retiring at 65 years old isn’t either!
A Charles Schwab study showed plan participants are likely to choose the plan’s match ceiling as their savings deferral level in order to maximize the employer contributions they receive – but no more. Similar findings were gathered in the Wells Fargo study, where 85% said they maximize their contributions up to their employer’s match ceiling.
A straightforward and workable response to address participant deferral challenges is for employers to reassess their current match formulas. We know that engaged participants will likely do all they can to maximize the contributions they receive from their employer. Lengthening a standard match formula may drive participant deferrals to levels that approach the new match ceiling without incurring additional matching costs. For example, a 50% match on the first 6% of contributions elongated to say a 25% match up to 12% may yield measurable savings improvements.