In its press release on the study, Hewitt said the study found that employees who do not contribute to their 401(k) plans can expect to replace as little as 52% of their annual pre-retirement income when they retire. By contrast, employees who do contribute to their company’s 401(k) plan can expect to replace 98% of their annual pre-retirement income, through a combination of 401(k), pension and Social Security income.
In addition, according to the release, the study found that if participants’ companies offer a 401(k) plan, without the added support of a pension plan or retiree medical subsidy, they may not be on track for retirement. Even if they are actively contributing to their 401(k), they could face a retirement income shortfall of nearly 27%. “Pension cost volatility and soaring health care costs are putting more companies in a situation where they can only afford to offer 401(k) plans as their retirement vehicle, yet many of their workers are not responding by stepping up their savings in these plans,” said Allen Steinberg, a retirement and financial management consultant with Hewitt, in the release.
The study found that two modest behavior changes could brighten the retirement outlook for employees.An average employee who contributes to his or her 401(k), but doesn’t have a pension plan or retiree medical subsidy, can reduce his or her retirement income shortfall to less than 5% by retiring two years later (at age 67) and contributing 2% more per year to his or her 401(k) than the average eight percent of pay.
Hewitt notes that, though retirees may expect to pay less in taxes and will no longer need to earmark a portion of their income for savings, they will need sufficient income to cover inflation and medical costs during their retirement.
In addition, Hewitt’s study indicates that most employees cannot afford to retire before the age of Medicare eligibility. For employees currently contributing to their 401(k) plan, early retirement can mean a retirement income shortfall of as much as 31% relative to what such employees may need in retirement. For employees who fail to contribute, early retirement can produce a shortfall as high as 88%.
Additional study findings, according to the release, include:
- For employees younger than 25 who contribute to their 401(k) plans, saving an additional 2% of pay in their 401(k) annually can boost income replacement levels by more than 17%. Mid-career employees can boost income replacement levels by 4% to 6%, moving closer to an adequate retirement income.
- Deferring retirement by two years increases employees’ retirement income levels by approximately 14%, regardless of whether they contribute to their 401(k).
- Heavy concentrations in company stock can lead to devastating losses in 401(k) portfolios, yet the average 25-year-old with company stock has 43% of his or her 401(k) balance in company stock. By improving diversification or assuming more risk levels, a 25-year-old can improve his or her retirement income replacement by as much as 20% to 25%.
- Retail mutual funds charge, on average, more than two and a half times the expenses of privately managed, commingled funds. Investing in retail mutual funds outside of plan-provided funds can reduce retirement income by nearly one-fifth over the long term.
- Mid- and late-career hires may be positioned less advantageously for retirement than employees with a full career of participation in their current employer’s retirement programs, even when outside assets such as prior 401(k)s and IRAs are taken into account. This may be attributable to the tendency of many workers to cash out their 401(k) savings upon termination rather than preserving these assets for retirement.
- More than half (54%) of employees in their 20s do not actively save in their 401(k) plans, which causes them to lose the value of their 401(k) savings that compounds over time.
- Thirty percent of employees in the study indicated they do not contribute to their employers’ 401(k) plans.
The full report can be accessed here .