Contribution Rate Inertia Poses Major Problems

August 12, 2014 ( – Thirty-six percent of Americans currently contributing to an employer-sponsored retirement plan have never increased the percentage of salary they defer into retirement accounts.

This is according to a recent survey from TIAA-CREF conducted among a national sample of U.S. retirement plan participants. The survey results show an additional 26% of current plan participants have not increased their defined contribution retirement account deferral in at least a year. Even employees who received a raise showed reluctance to increase salary deferrals—with 57% of workers saying they did not increase their plan contribution after their last raise.

Considering that 44% of American employees save 10% or less of their annual income each year, these findings indicate that many employees have the opportunity to improve their retirement readiness by increasing their plan contributions regularly, TIAA-CREF says.

Further exacerbating the deferral problem, TIAA-CREF says, is the fact that relatively few plans have adopted automatic enrollment. A full 53% of employees with access to workplace retirement plans say they were not automatically enrolled, according to the survey. As TIAA-CREF explains, those not automatically enrolled lost precious time saving for retirement, with 37% of respondents noting they waited six months or longer to enroll on their own, and 24% of employees waited a year or more (see “Auto-Enrollment Can Help Solve Balance Disparity”).

A commonly cited reason for not increasing contributions after a raise is the need to pay for short-term living expenses. A more encouraging sign is that 25% of respondents say they did not increase their contributions after their last raise because they were already contributing to their plan at or near the legal limit. TIAA-CREF says men (33%) were nearly twice as likely as women (17%) to be contributing the maximum amount allowed.

Another issue is that participants are not taking the steps necessary to make sure they have the right investments at each stage of their lives. Twenty-five percent of workers have never made changes to how their money is invested, and an additional 28% have not made changes to how their retirement savings are invested in more than one year.

Thirty-four percent of people age 55 or older say they have never made a change to the way their money is invested, meaning they are less likely to have taken the steps necessary to transition from saving for retirement to creating income for a lifetime. Changing markets also necessitates consistent asset rebalancing to ensure portfolios are maintaining appropriate equity and fixed-income exposures (see “Equity Overweighting Likely As 401(k)s See Record Balances”).  

“Plan sponsors should be proactively looking for opportunities to engage directly with employees about their retirement savings, especially during pivotal times such as benefits enrollment season and after an employee receives a raise,” explains Teresa Hassara, executive vice president of TIAA-CREF’s institutional business. “Reaching employees at the right time with the right messaging can have a profound effect on retirement readiness.”

An executive summary of the research, which highlights other important statistics around auto-enrollment and auto-escalation, is available here. TIAA-CREF worked with an independent research firm, KRC Research, on the poll of 1,000 adults nationwide.

-- Matthew Miselis