More and More Contributing Less and Less

October 3, 2013 ( – Fewer participants contribute anywhere near the maximum to their retirement accounts—which could translate into an opportunity for plan sponsors to address savings with their work force.

Over the past decade, the percentage of working adults who contribute 20% or less of the maximum amount allowed in retirement savings has soared, from just under 50% to more than 90%.

“Determinants of Defined Contribution [DC] Plan Deferral,” a study conducted by researchers at the University of Missouri, examined investing trends by individuals, both before and after the recent economic recession, and found what they called alarming statistics.

Rui Yao, assistant professor of personal financial planning in the university’s College of Human Environmental Sciences and the study’s lead author, investigated how the market influences individual retirement behavior, as well as individual risk tolerance, household saving motives (including the retirement saving motive), financial ratios as indicators of retirement adequacy and household debt delinquency.

“The findings are concerning because retirement inadequacy not only affects the individual household’s well-being during retirement but also could be a burden to the social support system,” Yao told PLANSPONSOR.

Yao examined how much income people invested in retirement funds and compared the amounts to Internal Revenue Service (IRS) limits on retirement contributions. Data from 2004, 2007 and 2010 were used to determine how behaviors changed after the Great Recession.

“We all know we should buy when the market is low and sell when the market is high,” Yao said. “But Americans are doing the opposite and actually contributing less when the market is low, such as during the recent recession.”

Retirement Savings Take a Dip

Yao, along with University of Missouri researchers Jie Ying and Lada Micheas, found that Americans, especially those who are middle-aged, should be saving much more for retirement. It is critical not only for their financial security but for the country’s sake as well, Yao said.

In 2004 and 2007, many people who set aside money for retirement contributed relatively small percentages of the allowable amounts. In 2010, contributions dipped even lower, the research found. That year, according to Yao, only 3% of working Americans reached the IRS maximum contribution level, a financial behavior she termed “very counterproductive.”

Americans are flying in the face of common sense, Yao said. “If Americans truly want to maximize their retirement funds, it is critical that they contribute more during a weak economy, while they can ease up a little when the markets are higher. They should also take advantage of the IRS maximum levels of contribution as much as possible.”

“Deferrals to DC plans have become more important than ever for eligible participants because of the uncertain future of Social Security, the transition from defined benefit [DB] to defined contribution plans and, therefore, the transfer of risks from employers to employees, and people’s increasing longevity,” Yao said. “Deviations from a rational saving behavior are likely to increase the likelihood of insufficient retirement savings.”

If anything positive can be taken from the research, Yao said it can be an opportunity to address participant behaviors based on fear, which run counter to common sense. Plan advisers and sponsors can educate participants on the importance of contributing higher amounts during poor economic times.


Jill Cornfield