The secret to retirement progress is out

The secret to retirement progress is out

Edmund F. Murphy III

Alchemy this is not. Since the broad establishment and growth of the defined contribution system over the last four decades, there’s been plenty of debate around the proper construction of retirement plans. We’ve engaged in the policy debates; read the behavioral finance theories; and considered all the pros and cons of various plan designs, advice models and participant communications strategies.

It’s all good work. But, like the medieval alchemists who once upon a time tried to create gold from base metals, we are never going to discover a single secret solution that will achieve full income replacement nirvana for all investors in 401(k), 457(b), 403(b) and other workplace retirement plans. It’s not going to happen.

However, some new survey results being published by the Empower Institute* are showing there may in fact be a simple principle to help get American workers closer to the retirement success they need.

The findings, published this week, are available in a new white paper titled “Scoring the Progress of Retirement Savers.” The paper includes survey results from 4,000 American workers ages 18 to 64. The results are encapsulated in Empower’s Retirement Progress Score (RPS), which is a numeric estimation of the percentage of working income American households are on track to replace in retirement.

An interpretation of the presented data shows employers can heavily influence the retirement prospects of their employees by offering key features in the workplace savings plans they sponsor. In turn, employees can help bolster their chances toward a secure retirement by actively pursuing financial advice and education, common features in modern retirement plans.

Collaboration between employers and employees is an essential ingredient necessary to achieving better retirement preparedness. Employers need to lean on providers and advisors for state-of-the-art plans. Likewise, eligible employees need to realize that engagement with their retirement plan may be in their best interest over the long term. Those who seek the help of an advisor and learn about the basics of their retirement plan are going to have a much better chance at achieving their retirement goals than those who do not.

It’s clear that employers and employees need to travel the road to retirement together.

Consider these key takeaways for employers:

Start by creating a plan for workers: The survey highlights a long-held view that those who are eligible to participate in a workplace retirement plan have a much higher chance of replacing their working income in retirement than those who do not have access — 79% versus 45%. Nearly 80% of those who have access to an employer-provided plan are confident they are making the most of it to build the retirement income they need.

Enroll employees automatically: Workers in auto-enrolled plans are on track to replace 95% of their income compared to those who manually opt in to a plan, who are on track to replace 84% of their income in retirement on average.

Boost their contributions: The retirement picture is even better for those workers in plans that feature auto-escalation. Those workers achieve a median retirement income replacement score of 107% — a full 27 percentage points higher than those in plans without the auto-escalation feature.

For employees, habits for success include:

Knowing the match: An employer that offers a match is offering free money to their employees. Among those employees who understand the matching formula in their plan, 73% (56 % of total survey participants) set their savings rates to capture the full match.

Helping eligible employees become more knowledgeable about their plan might spur them to make different savings decisions to take full advantage of their plan’s match feature.

Getting advice: Respondents who work with an advisor have a 33% advantage (91% versus 58%) in projected income replacement versus those who do not. We know what it takes to make these plans work effectively — there is no secret to this. The challenge/opportunity before us is to help employers and employees understand what we all need to do to create the retirement security workers in the U.S. deserve. And that’s worth more than gold.

*The research was organized by Empower Institute in collaboration with Brightwork Partners, LLC. Brightwork Partners, LLC., is not affiliated with Empower Retirement.

The views and opinions contained here are my own, not those of Empower Retirement, and are intended to be educational and should not be relied upon for tax, legal or investment advice.

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