Data & Research May 3, 2010

Workers Need 15x Final Pay in Retirement

The average U.S. employee will need 15.7 times their final pay in retirement resources to maintain their current standard of living during retirement, according to a new analysis by Hewitt Associates.
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A Hewitt news release said Social Security is expected to provide 4.7 times final pay, leaving employees responsible for accumulating the remaining 11 times final pay from other sources such as company-provided plans and personal savings. Hewitt said the latest data is consistent with its prior projection in 2008.

Hewitt’s analysis reveals that 18% of employees who contribute to a defined contribution plan and work a full career are expected to achieve the retirement readiness goal. On average, these employees are on track to accumulate 13.3 times their final pay (including Social Security) leaving a shortfall of 2.4 times pay, Hewitt said. In other words, they’re expected to meet just 85% of their financial needs in retirement. Nineteen percent are expected to have a shortfall of five time’s final pay or more at retirement.

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Meanwhile, as a result of recent market volatility, four out of five workers are still expected to fall short of meeting all their financial needs in retirement unless they take action to improve their savings habits or retire at a later age.

On average, workers who rely solely on a defined contribution plan to fund their retirement are projected to meet just 74% of their needs in retirement—compared to 91% for employees who are also covered by an active or frozen defined benefit plan.

“Employees have been able to recoup a good portion of the retirement assets they lost due to market volatility, but unfortunately most workers are still falling significantly short of meeting their retirement needs,” said Rob Reiskytl, Hewitt’s leader of Retirement Plan Strategy and Design, in the news release.

What Workers Need to Do

Hewitt’s analysis revealed that workers can significantly improve their situation by making a few small adjustments:  

  • Start saving: According to recent Hewitt research, 26% of eligible employees do not contribute to a defined contribution plan. Hewitt projects these workers will have saved, on average, less than half of what they will need by the time they reach retirement age.
  • Regularly increase your contribution rate: Hewitt’s analysis reveals that many workers who commit to increasing their retirement contributions by as little as 1% each year for five years will be on track to meet most of their financial needs in retirement.
  • Work longer: According to Hewitt’s analysis, employees who delay retirement to age 67 can significantly reduce their savings shortfall.

Hewitt examined the projected retirement levels of more than two million employees at 84 large U.S. companies for the study.

IMHO May 3, 2010

IMHO: Why Bother?

Here’s a question to ask your plan sponsor clients: “Why do you offer a 401(k) plan?”
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I’m guessing that many, perhaps most, would say simply, perhaps without giving it much thought, “to attract and retain good employees.”  That’s what more than half of the plan sponsors canvassed in a recent Wells Fargo survey said (see “Survey Suggests Gaps in Plan Sponsor Goals, Roles”), and it’s one of the top reasons cited by none other than the Department of Labor).  I’m guessing a similarly high number would say that they “have” to offer the plan as part of their benefit offerings to be competitive. 

In fact, I was surprised that 45% of the respondents to the Wells Fargo survey indicated that a primary goal of the program was to provider workers with the means to arrange for a financially sound retirement.  Not that that isn’t in the back of plan sponsor minds; I just don’t think it looms large as a rationale for the time, energy, and expense of establishing and keeping these programs in place.

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Still, I think for most employers, these programs remain a “take-it-or-leave-it” proposition.  Oh, they want employees to take advantage of them—and participation rate remains a key metric for many programs.  But I suspect that most employers think that, if they offer a program that allows workers to save efficiently and effectively (and at a reasonable price), well, I suspect they feel that they have lived up to their end of the bargain.

Of course, we all know that the employer plays a key role in the true success of these programs, and that an active and engaged plan sponsor is worth their weight in gold (literally) in terms of getting workers to participate, and to participate at levels that eventually can help ensure their financial independence. 

We all know who they are.  Generally speaking, they are the ones who go above and beyond the mere requirements of the law regarding plan information and communication.  They are the ones who not only inspire confidence in their plan, but in the ability of their co-workers to take an active role in helping ensure their own financial well-being.  They are the ones who adopted automatic enrollment before it was “cool” (or sanctioned via the Pension Protection Act); who probably know exactly how much their plan costs; and, yes, who probably, early on, saw the advantages in bringing the help of a financial adviser to their program.  And, yes, odds are they are also the ones who have plans with higher participation and deferral rates, and a more motivated group of participant savers, to boot.

I’m sure many who don’t take those steps are nonetheless attentive to the requirements and obligations of their duty as a plan fiduciary—they simply lack the time, energy, or volition to make that kind of commitment.  Some, I’m sure, worry that going beyond the law’s requirements places their firm—and them personally—at risk.  

But, in my experience, employers who adopt a “take-it-or-leave-it” approach often find that that is exactly how their workers feel about their retirement plan.

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