DC Plan Dominance Is Overstated, But Not For Long

Among today’s retirees, nearly nine in 10 (86%) fund their retirement primarily with Social Security and pension income.

The newly published 2019 Wells Fargo Retirement Study, now in its 10th edition, compiles the survey reposes of some 2,700 workers and another 1,000 retirees.

The Wells Fargo study outlines several key characteristics that influence today’s retirees, who, in this survey, are 70 years old at the median. Among retirees, nearly nine in 10 (86%) fund their retirement primarily with Social Security and pension income. Currently just 5% say personal savings accounts, such as a 401(k) or individual retirement account (IRA), are their main source of retirement funding. In addition, 70% of those surveyed said they “wouldn’t know what to do” to fund their retirement years effectively if Social Security benefits were substantially cut.  

According to Fredrik Axsater, head of the institutional client group for Wells Fargo Asset Management, these stats show the generational change from pensions to defined contribution (DC) plans is still very much playing out. Despite recognition that saving and paying for retirement will increasingly rest with the individual, younger generations hold mixed views about whether they are saving enough.

As Axsater points out, debt plays a critical role in workers’ inability to save sufficiently. In fact, 31% of Millennials surveyed say they have an “unmanageable amount of debt,” followed by Generation X (26%). Fully 67% of workers paying off student loans say the burden of student loans is getting in the way of saving for retirement.

“I would say that Generation X stands out as the most vulnerable in the survey population,” Axsater says. “They are caught in the middle of the shift from pensions to personal savings, and at the same time they are caught in the middle of supporting their own growing children and aging parents.”

In reviewing the Wells Fargo data, Lori Lucas, president and CEO of the Employee Benefit Research Institute, says many people appear to be over confident about their retirement prospects—even with the debt challenges already mentioned. She notes that nearly a third of workers have personally saved less than $25,000, while 13% have saved between $25,000 and $100,000. Just 11% of those in the Wells Fargo survey have saved between $100,000 and $250,000. This means in turn than half of workers have saved less than $250,000. Looking at workers on a median basis, including those with no savings, Baby Boomers have $160,000 saved, Generation X has $66,000 and Millennials have $10,000.

Zar Toolan, head of advice and research, Wells Fargo Advisors, says the survey results underscore the importance of instilling “a planning mindset” in people. This entails such things as helping them set a long-term goal, helping them set and achieve shorter terms goals, and ensuring they understand the importance of making sacrifices today to benefit themselves in the future. In a phrase, those survey respondents that have such a planning mindset are far ahead of their peers in terms of accumulated savings, confidence levels, projected retirement readiness, etc.

By generation, the planning mindset is highest among retirees (42%), followed by Millennials (39%), Baby Boomers (37%) and Generation X (30%). Current workers with the planning mindset start saving at a younger age, save more each month for retirement and have saved more for retirement than workers without the planning mindset. Lucas suggests the best way to get people to have such a planning mindset is simply to help them generate a balance in a retirement plan.

“This emphasizes the importance of automatically enrolling workers into retirement plans,” Lucas says. “Once people see even a few thousand dollars accumulate in a retirement plan, they become far more engaged.”

Other findings show that, across generations, workers and retirees voice strong emotions about the importance of Social Security and the need for the nation’s political leadership to tackle the retirement security topic. As such, 91% of workers and 95% of retirees say they would feel betrayed if the money they paid into Social Security was not available when they retire. At the same time, 90% say Congress needs to make it easier for workers to have access to tax-friendly retirement plans, and 79% believe companies should automatically enroll new employees into such plans. 

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