The average 401(k) and other defined contribution (DC) plan participant now defers more than 8% of their annual income toward retirement savings through their plan and Social Security taxes. But the typical worker near retirement only has about two years of replacement income saved, or about 15 years short of the median lifespan post-retirement, according to HelloWallet’s paper, “Debt Savers in Defined Contribution Plans: Size, Causes, and Solutions.”
One explanation may be the increase in household debt. With more household income going to pay off debt, households may have less money to save and consequently may face higher costs of living in retirement, said Matt Fellowes, founder and chief executive of HelloWallet, and the paper’s author. (The paper was co-written by Jake Spiegel, a research associate at HelloWallet.)
The monthly debt obligation of active DC households near retirement (between 50 and 65 years old) increased by 69% between 1992 and 2010, now adding up to about 22 cents of every $1 earned. The average DC participant is accumulating debt faster than he or she is accumulating retirement savings, the paper found.
Plan sponsors may scout a number of strategies to help participants save more, but no single practice is likely to be the answer.
Automation features – enrollment, and escalation – are necessary but insufficient on their own to help workers improve their retirement readiness, Fellowes told PLANSPONSOR. “In fact, participants that increase their savings deferrals are more at risk of increasing debt faster than savings, compared to those that do not increase savings deferrals,” he said.
Another piece is access to guidance, Fellowes said. “Plan sponsors can move the retirement readiness needle among their participants by providing access to holistic, independent guidance that is accountable to sponsors and produces regular, measurable retirement readiness metrics,” he said. “Given new technology innovations and insight into consumer psychology, this is a problem that sponsors can now meaningfully address in their plans."
particular, Fellowes said, access to independent guidance that addresses all
the drivers of retirement success, in addition to an individual’s 401(k)
balance, can improve retirement readiness. Guidance or advice should produce
regular, measurable success metrics. “We now work
with some of the largest plans in the country and have dozens of examples that
sponsors can materially improve the financial health and retirement readiness
of their population,” Fellowes said. “To be sure, it's hard work.
But, by relying on technology and psychology, we are
cracking this nut.
Using data from the Federal Reserve and the Census Bureau, key findings include:
- More than 20% of households that have a 401(k) or other DC plan added more credit card debt to their family balance sheet than they contributed to retirement savings between 2010-11 and 2006-07 – the years data is available from.
- DC participants who accumulate debt faster than retirement savings have 50% less of their annual income saved for retirement compared with participants who contribute more to their retirement funds than they accumulate in debt.
- Most DC participants who accumulate debt faster than retirement savings are over 40 years old, college educated, earn over $50,000 and have insufficient emergency savings.