Many Unsure 401(k) Will Produce Adequate Income

A survey from Pentegra Retirement Services finds that among U.S. adults who are employed and enrolled in a 401(k) plan, 65% do not believe or are unsure that their plan will provide enough money for them to retire when they want to or plan to. Nonetheless, 75% of 401(k) participants still think that 401(k) plans are the most important source of a person’s retirement income, according to the survey.

Survey findings also reveal that 45% of 401(k) participants are contributing only 6% or less of yearly earnings to their retirement account. However, 42% of 401(k) participants say they understand that you do not have to pay taxes on contributions made to the plan.

“We cannot emphasize enough the importance of putting this money away and taking advantage of a 401(k) plan, not only for retirement but also to save money on taxes,” says Rich Rausser, senior vice president of client services at Pentegra Retirement Services in White Plains, New York. “Tax deferred contributions through a 401(k) plan lower your reported income, so the more you contribute the less taxable income you have. It is a win-win. By saving $20 per week on a $400 weekly salary, you are left with $380. After subtracting the 28% federal tax amount, your take-home pay is $274. Put that same $20 into a (taxable) savings account, and your take-home pay drops to $268. That six-dollar difference may not seem like much now, but multiply it over 52 weeks for 25 years and you are looking at pocketing an extra $7,800.”

The fact that nearly two-thirds of 401(k) participants do not believe or are not sure that their 401(k) plan will provide enough money in retirement is discouraging news, says Rausser. “The fact is that you need to try to save enough to provide income replacement of 80% to 90% of your annual pre-retirement income, for each year in retirement, in order for you to enjoy a lifestyle similar to the one you have now.”

In addition, the survey also reveals that three in 10 (31%) 401(k) participants admit they have no understanding of where or how their plan contributions are being invested. Thirty-seven percent of 401(k) participants say that as long their plan balance is there for them when they want it, they are not concerned with how it is invested.

Rausser encourages people to have a greater understanding of the process. “People really need to have a basic knowledge of how their money is being invested and how the process works. This is your hard earned money and your future. Take the time to sit down, even just once a year, with someone in charge of your plan. Ask questions and get answers you understand.”

On an encouraging note, says Rausser, the survey finds that 63% of 401(k) participants have increased their contributions at some point. Only 19% of participants say they have never increased their contributions.

“Increasing your contribution every year is the key to retirement planning success,” adds Rausser. “Each time you get a raise, increase your contribution by at least 1% or 2% annually. A simple way to do this is to have an automatic escalation feature as part of the 401(k) plan, so that contributions are increased automatically on an annual basis. This puts saving on auto-pilot so that participants don’t have to think about it.”

Other highlights of the survey include:

• On average, the last time 401(k) participants increased their contribution was 2.4 years ago.
• For those with a total annual household income (HHI) of $50,000 to $74,900, the last time they increased their contributions was 2.6 years ago. Those with a HHI of $100,000 or more increased their contribution 2.5 years ago. By contrast, those with a HHI of less than $50,000 last increased their contributions only 1.2 years ago.
• Those who contribute more than 10% of their salary to their 401(k) plan most recently increased their contribution on average 3.3 years ago, significantly longer than the average of 2.1 years ago for those who contribute 10% or less of their salary.
• Over two-thirds (68%) of 401(k) participants do not expect to use their 401(k) until they are required to take the mandatory minimum distribution (at age 70½).
• About one-third (32%) of 401(k) participants believe that starting a 401(k) later in life with larger contributions will yield the same results as if they had started at a younger age with smaller contributions.

The survey was conducted online within the United States by Harris Poll, on behalf of Pentegra Retirement Services, from February 10 to 12, among 2,059 U.S. adults ages 18 and older, among whom 446 are employed full-time or part-time and are currently enrolled in a 401(k) plan.

More information about the survey can be downloaded here.