Participants Fall Short of Savings Need in Retirement

July 1, 2008 ( - According to new research from Hewitt Associates, less than one in five (19%) employees who participate in their companies' 401(k) plans will be able to meet 100% of their estimated needs in retirement.

When factoring in inflation and increases in medical costs, Hewitt predicts that employees will need to replace, on average,126% of their final pay at retirement, the company said in a press release. This is significantly more than the traditional expert estimates of 70% to 90% pay replacement.

The study, which examined the projected retirement levels of nearly 2 million employees at 72 large U.S. companies using actual employee balances and behaviors, found that on average, employees are projected to replace just 85% of their income in retirement. More than 1.2 million employees (67%) are expected to have less than 80% of their projected needs at retirement, the press release said.

According to research results, the situation is more serious for employees who do not contribute to their 401(k) plans. While employees who contribute an average of 8% of pay to their plan can replace 96% of their preretirement income at age 65, that number drops to 54% for those employees who do not contribute. Employees who have a pension plan may expect to replace just 62% of their income at retirement if they do not contribute to their 401(k) plan, Hewitt said.

Hewitt’s study found that employer-subsidized retiree medical coverage can help employees achieve adequate retirement savings levels. Employees who are offered a high level of employer subsidy – typically covering half of total costs not covered by Medicare – could have their retirement income shortage reduced to only 12% of final pay, rather than the average 15%, if they are saving in their 401(k) plan.

On the other hand, the fact that people are living longer is making the retirement savings picture worse. Hewitt said assuming employees need to prepare for a longer life span – approximately 10 years beyond the expected lifetime of 84 years old for someone age 65 – increases the average shortfall by 80%.

Results from Hewitt's research seem to suggest the following strategies can help employees boost their retirement savings:

  • Retire later and save more - For employees who contribute to their 401(k) plan, retiring just two years later - at age 67 - and saving 2% more a year (an average of 10% total contribution) boosts projected retirement income replacement from 85% to 107% of final pay.
  • Start early and take advantage of match - Failing to participate in a 401(k) plan may mean leaving money on the table in terms of an employer matching contribution. According to Hewitt research, more than 90% of large companies offer an employer match. Employees hired before the ages of 25 - 35 who have more than 30 years of service at retirement can generally replace over 100% of their final pay at retirement if they contribute, on average, 8% of their pay each year throughout their career.
  • Take advantage of advice and target date funds - Diversify with an appropriate risk tolerance and do not invest too much in company stock.
  • Watch out for fees - Hewitt's study finds that additional annual expenses of 0.25% - the difference between the typical institutional fund and retail mutual fund portfolio - can reduce projected retirement income adequacy substantially over time. For younger employees, these higher costs can erode 401(k)-related retirement income levels by nearly 6% in retirement.

A copy of the complete report, "Total Retirement Income at Large Companies: The Real Deal," is available for $600 by contacting the Hewitt Information Desk at (847) 295-5000 or .