In the white paper “Scoring the Progress of Retirement Savers,” the Empower Institute analyzes results from a survey of more than 4,000 American workers aged 18 to 65, and estimates the percentage of working income that American households are on track to replace in retirement.
Gaps
The study found a significant gap. But it was not so much between the saving levels retirees will need and their actual balances and what their balances are likely to be; it was between the results for those whose behaviors are conducive to saving and the results for those whose are not.
The median projected income replacement among participants in the study was 64%. But any median ultimately is derived from calculations that account for extremes, and Empower Institute’s results are no different. In this case, they found a “wide gap” between those who plan for their retirement and those who do not; between those save and those who do not; and between those with high contribution rates and those whose rates are low.
Following is a look at the gaps in projected income replacement levels given various factors.
Projected Income Replacement Levels During Retirement By Factor
Factor | Income Replacement Rate |
Has Access to Employer-Provided Plan | 79 |
No Access to Employer-Provided Plan | 45 |
Participates in a DC Plan | 85 |
Does Not Participate in a DC Plan | 57 |
Defers 10% of Pay or More | 128 |
Defers 3% of Pay or Less | 59 |
Auto-Enrollment | 95 |
Must Op-In | 84 |
Auto-Escalation | 107 |
No Auto-Escalation | 80 |
Glass Half Full
A potentially important bit of optimism with positive implications for retirement saving: the study found high levels of optimism about the prospects for the U.S. economy and for job security. More specifically, nearly 80% of respondents said they expect the economy to grow in the next year, and almost 25% of them expect strong growth (at least 3% per year or more). The Empower Institute says this is “among the most positive outcomes we have seen since the study began in 2011” and adds that sentiments about job security are almost as strong.
Another reason for optimism — the study found that Millennials have the highest projected rate of income replacement during retirement of any demographic group, 75%, 14 percentage points higher than the next generation, X, as well as the younger Baby Boomers, and 20 percentage points higher than the older Baby Boomers. The Empowerment Institute said of this that “This result is not surprising — and suggests the impact of saving early in one’s career.”
The Empowerment Institute’s positive findings are in keeping with sentiments American Enterprise Institute Senior Fellow Andrew Biggs expressed at the recent PSCA Annual Conference, in which he spoke of a “much more positive story to tell” than that spun by those who warn that saving levels are too low. Similarly, the Employee Benefit Research Institute (EBRI) recently issued a study in which it found that retirees generally exhibit very slow decumulation of assets.
What’s an Employer to Do?
The study makes some suggestions regarding what employers and plan sponsors can do to improve employees’ income replacement levels during retirement. These include the following.
Employer Match. The study days that an employer match affects saving behavior; of those who know what their employer’s match is, 73% set their contribution levels accordingly.
Personalized Help. The Empower Institute found that at least 80% of employees find working with a financial specialist at least somewhat attractive. They conclude that offering personalized help “is likely to enhance appreciation for the plan while increasing the number of employees who are on track to accomplish their retirement goals.”
Auto Features. The study says that features such as auto-enrollment and auto-escalation “drive higher retirement progress scores.”
Education. “The more employees know about specific financial needs in retirement, the more likely they are to take action to meet these needs,” the study says, adding that “Employees who are confident in their understanding of various factors like healthcare costs and overall income requirements have a higher median lifetime income percentage than those who do not. Even educating employees on the plan’s match may influence contribution levels.”
- Log in to post comments