Many U.S. workers lag behind on retirement savings

Business Wire

American workers are falling short of their retirement savings goals, according to survey findings published last month by Boston-based Natixis Global Asset Management.

The survey also found that the youngest members of the workforce, ages 18 to 34, are pioneering a new set of standards for employer-sponsored retirement savings plans.

The Natixis Global Asset Management 2016 Retirement Plan Participant Study polled about 950 workers of all ages across the U.S. who have access to a retirement plan at work. The survey found that most-86 percent-recognize their own responsibility to fund retirement, but they need more help from employers, in terms of better education, stronger incentives, and assistance with other financial pressures.

According to the survey, millennials are much more likely to want substantial change. Nearly seven in 10 millennials surveyed, compared to 55 percent of baby boomers, believe individuals should be required to contribute toward retirement savings. Also, 82 percent of millennials and 77 percent of Generation X agree that employers should be required to offer retirement plans.

Three-quarters of millennials polled say businesses should be required to chip in and provide matching funds, but only two-thirds of baby boomers concur.

Also, 84 percent of millennials want investment options that reflect their personal values.

On average, millennials first enrolled in a retirement savings plan at age 23, while Gen Xers signed up at age 27 and baby boomers at 31. Even though they started saving for retirement earlier than previous generations, millennials' openness to 401(k) mandates might stem from an increasing sense that retirement security is their own responsibility, in part because they aren't confident Social Security will be a strong source of income.

Eight of 10 baby boomers are counting on Social Security benefits in retirement, but millennials aren't as optimistic, with just over half believing such benefits will be available to them when they retire. Although the Social Security trust fund is fully paid for today, it will be only threequarters funded by 2034, according to the status of the Social Security and Medicare Programs, Summary of the 2016 Annual Reports.

"Retirement planning has become a lot more complex since the first 401(k) was introduced 35 years ago, and the burden of saving has shifted increasingly to individuals over that time," says John Hailer, CEO for the Americas and Asia at Natixis Global Asset Management and head of global distribution. "Helping people prepare for retirement is one of the most important things we do, so it's critical that the financial industry, business, and government leaders work together to provide the tools people need and the education to use them effectively."

Many not on track

Six in 10 people surveyed claim to know how much annual income they will need in retirement. However, both their savings goal and contribution levels aren't high enough to reach their intended targets. Baby boomers say they'll need about $935,000 and are 34 percent of the way there. Gen Xers have 24 percent of their target of about $810,000. Millennials have 8 percent of their goal of $870,000, having started saving four to eight years earlier than prior generations.

Even for workers who participate in their companies' defined contribution plans, their savings rates aren't high enough to reach projected targets. Two in five plan participants contribute less than 5 percent of their annual salaries to employer-sponsored retirement plans. Furthermore, some Americans are undermining their progress by scrambling their own nest egg. Nearly one in three retirement plan participants, including 43 percent of millennials, have taken a withdrawal from their retirement savings plan.

"Younger workers in particular are grappling with a different set of retirement challenges compared to previous generations," says Ed Farrington, Natixis' executive vice president for retirement strategies. "Their retirement savings strategies are encumbered by a number of factors such as student loan debt, a lack of company pensions, and a sense of doubt that Social Security will be a source of income in retirement. Employers would do well to focus on designing comprehensive plans that offer greater incentives and a better range of investment choices that especially appeal to this large portion of the workforce."

Plan sponsors' steps

The survey found that even when given the chance, many U.S. workers choose not to participate in their employer-sponsored retirement savings plans, which is true for 300 respondents in the Natixis survey. For them, the biggest obstacle to signing up is employers' failure to offer enough matching funds or to offer any match at all.

However, eight in 10 surveyed workers believe employers should be mandated to offer retirement savings plans. And concerns over retirement security are so high that 61 percent of respondents, including 58 percent of those who don't participate in the plan they have, said they are willing to accept mandatory contributions for themselves to establish a savings discipline.

For the workers who do participate, the biggest draws are company matching contributions, cited by 63 percent of participants; tax incentives (56 percent), and the convenience of having money automatically deducted from their paychecks (52 percent). Additionally, over two-thirds of workers would contribute more if their employer offered a larger match. Nearly three-quarters believe employers should be required to provide matching contributions.

The study identifies four ways employers can step up efforts to improve retirement savings: provide access to financial advice, let new employees sign up for plans immediately, improve employee financial education, and look for tailored approaches.

Professional advice and guidance lead to higher savings levels, and better savings and investing decisions. For the participants in its survey, Natixis found that people who receive professional financial advice have saved on average 10 percent more of total retirement savings than those who go it alone, and 17 percent said they would save more if they had access to professional advice.

With the U.S. Department of Labor's fiduciary standard scheduled to take effect in April, some workers could lose access to an adviser through their retirement accounts. Employers could step up by offering access to financial advice in their workplace savings plan. Just 30 percent of active plan participants surveyed say they are offered that service by their employer.

The power of participation is in plan features that overcome savings inertia. Allowing plan participation from the first day of employment might help improve participation rates and increase employee contributions. Eight in 10 said they would save more if they could start on the first day they joined a new employer. Automatic escalation features also serve seamlessly to increase contributions, with 23 percent indicating that would incentivize them to save more.

Education is needed for plan participants and even more so for nonparticipants. The survey found that almost half of all respondents, including 38 percent of plan participants and 60 percent of nonparticipants, don't know how much they need to save annually in order to meet their future retirement goals. There is work to be done on the financial literacy front, too. Just over half of respondents knew the correct answer to a survey question about compounding interest.

Concerning tailored approaches, the survey results suggested that employers need to look closely at the generational differences in savings behaviors, the motivations to save, and the barriers to savings. The survey found that respondents are holding back for various reasons, including rising health care costs (35 percent) and saving for children's college funds (20 percent). A third of millennials said student loans are an obstacle. Offering programs such as health savings accounts, student loan forgiveness, and higher education savings plans would relieve pressure for many and enable them to save more.

"Employers have a crucial role to play to help more Americans achieve a financially secure retirement," Farrington says. "Our research shows that, with or without mandates, employers can meaningfully improve their employees' prospects for retirement security through thoughtful plan design. But the first step to driving participation is making retirement plans more accessible by providing education and advice that helps employees take full advantage of all that their retirement plan has to offer."

Natixis Global Asset Management surveyed about 950 American workers who are eligible to participate in an employer-based defined contribution retirement plan, such as a 401(k). Of the total, 650 workers are enrolled in such a program, while 300 don't participate. The age groups are broken up as follows: 285 millennials, 18 to 34 years old; 283 Generation X, 35 to 50 years old; and 383 baby boomers, 51 years old and older. Data was gathered in August and September 2016 by the research firm CoreData.

Natixis is ranked among the world's largest asset management firms, with assets under management totaling $897 billion as of Sept. 30.