Empower Institute: Plan match, advice seen as keys to higher income replacement rates
New survey highlights importance of employer-employee collaboration in driving retirement preparedness
Across the nation, workers on track to replace 64 percent of income in retirement
Auto-enrollment, auto-escalation income replacement rates are 95 and 107 percent, respectively
New survey results indicate that American employers can heavily influence the retirement prospects of their workers by offering key features in the workplace savings plans they sponsor. In turn, employees can bolster their own chances at a secure retirement by actively pursuing financial advice and education for their own benefit.
An employee match that’s understood by workers, the availability of professional advice, auto features and plan access are all shown to be crucial elements to increasing retirement preparedness.
The findings, published by the Empower Institute, 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 who are saving for retirement in a workplace plan, such as a 401(k), 457(b) or 403(b) plan. The results are encapsulated in Empower’s Retirement Progress Score (RPS), which is a numeric estimation of the percentage of working income that American households are on track to replace in retirement.
The survey results show the median projected income replacement among the survey participants is 64 percent – meaning Americans, on average, are on-track to replace 64 percent of their current income in retirement.
Key findings include:
- Knowing the Match: Among those workers who understand the matching formula in their plan, 73 percent set their savings rates to capture the full match (56 percent of total survey participants).
- Getting Advice: Respondents who work with an advisor have a 33 percent point advantage in projected income replacement versus those who do not. Respondents using an advisor have an RPS of 91 percent versus 58 percent for those with no advisor.
- Plan access: The survey highlights a long-held view that those who are eligible in a workplace savings plan have a much higher RPS than those who do not have access – 79 vs. 45 percent. Nearly 80 percent of those who have access to an employer-provided savings plan are confident that they are making the most of the plan to build a secure retirement income.
- Auto-enrollment: Workers in auto-enrolled plans are on track to replace 95 percent of their income compared to those who manually opt in to a plan who are on track to replace 84 percent of their income in retirement, on average.
- Auto-escalate: 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 percent – a full 27 percentage points higher than those in plans without the auto-escalation feature.
“Collaboration between employers and employees is an essential ingredient necessary to achieving better retirement preparedness,” said Edmund F. Murphy III, President of Empower Retirement. “After making the crucial decision to offer a retirement plan, employers should consider plan design features that have proven to be effective.”
“Likewise, employees 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 a secure retirement,” he said. “It’s clear that employers and employees need to travel the road to retirement together.”
The survey results indicate that modern plan design is clearly gaining greater appreciation and that is resulting in higher levels of confidence and better indicators of retirement preparedness. The adoption of some plan features, particularly auto features and advice, are starting to have a positive impact on retirement savings.
“With plan access on the rise, we’re starting to see an increase in plan effectiveness as well – and that could have positive ripple effects on retirement preparedness across the board,” said Murphy.
The survey results show that an employer match affects employees’ saving behaviors—not only the availability of the match, but the degree to which employees are educated about the level of the match. Traditionally, a matching feature has served two purposes: to help fund employees’ retirement and encourage employees to save.
In fact, of those who know their plan match, 73 percent (56 percent of total survey participants) set their contributions accordingly. An opportunity area for plan sponsors and advisors to improve plan results may lie in the group of employees that doesn’t know their match level.
“Helping workers to become more knowledgeable about their plan might spur them to make better savings decisions to take full advantage of the match feature,” said Murphy.
Other key findings/conclusions of the study indicate that optimism is up with 78 percent of respondents expecting the economy to grow in the next year. Of those, 18 percent are predicting the economy will grow by 3 percent a year or more.
In addition, workers earning less than $50,000 a year are more likely than higher-income workers to change their savings habits if tax benefits change, with 28 percent predicting a drop in contributions.
Murphy noted that defined contribution plans have taken a stronger position in the mind of American workers who are saving for retirement. According to the survey, 56 percent of respondents indicate their defined contribution plan would be their source of income in retirement.
“We know what it takes to make these plans work effectively,” he said. “The challenge and opportunity before us is to help employers and employees understand what we need to do to create the retirement security that workers deserve.”
The research was organized by Empower Institute, in collaboration with Brightwork Partners, LLC.