Participants Deferring Less Than 10% at Risk in Retirement

According to Putnam’s Lifetime Income Score, households that defer 0% for retirement are on track to replace 54% of their income at retirement with Social Security, but only 16% without it. Households that defer up to 3% are on track to replace 56% of income with Social Security and 23% without it, and those who defer 3% to 10% can replace 84% of income with Social Security, but 50% without it.

Putnam also found that households with access to a defined contribution (DC) plan do not always participate. Of the 60% of households eligible for DC plans, 8% do not contribute to a plan. Of that 8%, 3% are not contributing but have a balance (lapsed contributors); and 5% have never enrolled in a workplace plan.

Those eligible but never enrolled will rely more heavily on Social Security than the average household (36% versus 32%) and less on retirement plan savings (16% versus 26%).

These numbers underscore the importance of plan sponsors and advisers encouraging participants to save at an adequate rate to replace income in retirement, especially with the uncertain future of Social Security. “At the end of the day, the real driver is, ‘Are you saving enough?’” Ed Murphy, head of defined contribution at Putnam, told PLANADVISER. 

Retirement planning often focuses on asset allocation, but Murphy said the savings rate is crucial. Automatic enrollment with an opt-out option, as well as higher initial deferral rates, can help close the savings gap. “I think there’s still an awareness challenge … in terms of helping people understand the serious aspect of this,” he said.

“I think [retirement preparedness] all starts with this issue around the inadequate savings rates, the inadequate balances,” he added.

Plan sponsors should enlist the help of providers and advisers who view retirement income replacement as a key metric to participant success, according to Murphy. “We believe unequivocally that workplace savings is the way to get at this issue around retirement preparedness,” he said.   

Putnam’s research indicated that 71% of DC-eligible households view retirement as a major savings objective. Sponsors should seek providers and advisers who offer an array of tools and resources to help participants meet this objective. According to Putnam’s research, 29% of DC-eligible households have an adviser.