Thirty years ago, half of all workers in the United States had a traditional pension plan, according to the U.S. Department of Labor. That meant that in retirement, they received a decent-sized check in the mail each month. By 2010, the percentage of employees covered by a pension plan had slipped to 7%. Today, the lion’s share of companies (69%) sponsor 401(k) retirement plans. But not all employees participate, and some who do participate fail to tuck away enough of their salaries to ensure an adequate retirement.
Although 74.4 million workers have amassed $3.1 trillion in savings in their 401(k) plans, according to a 2012 Deloitte study, that’s a drop in the bucket. In a separate Deloitte survey of a broad base of employers earlier this year, 15% said less than half their employees participated in the 401(k) plan. With regard to participants’ savings rate, employees in the half of the plans that required automatic enrollment were saving a paltry 3%, according to the Defined Contribution Institutional Investment Association.
While retirement advisers agree that auto enrollment has made a huge difference in the overall savings of employees, they criticize the savings rate of 3% of salary traditionally used as the default when automatically enrolling employees. “It’s definitely too low a peg,” says Josh Cohen, defined contribution practice leader in the Chicago office of asset manager Russell Investments.
Brigitte Madrian, Aetna Professor of Public Policy and Corporate Management at the Harvard Kennedy School in Cambridge, Mass., agrees the rate will get retirees nowhere near what they will need to live on. “Sixty percent of plans have a default contribution rate of 2% or 3%, which is on the conservative side,” she says. “Historically, the reason for this is that employers were afraid if they picked a higher default rate, more employees would opt out of the plan. This is not the case empirically, however. We find that at 6% and higher, opt-out rates barely budge.”
Other ways to promote better retirement outcomes include dissuading employees from taking hardship loans from their plan savings. “People think because it is largely their money in the first place that there’s nothing wrong with borrowing from it,” says Madrian. “If there is indeed a true hardship that requires immediate access to money, that’s one thing. But all too often employees borrow from their savings to do things like pay for a vacation or buy a new car.”
Another problem with such loans can occur when an employee with a loan is fired or voluntarily leaves the company. “Most companies require that the loan be paid back to the plan within 30 days,” says Madrian. “Many employees can’t come up with the money, however, and end up defaulting. While this isn’t the same as defaulting on a bank loan, which would affect one’s credit rating, it’s still ‘leakage’—money taken out of the retirement savings system.”