Retirement Plan Non-Participants Likely to Participate Later

Reports of overall retirement plan participation can misrepresent the retirement preparedness of American workers, according to ICI, because data shows more employees participate as they earn more and get older.

A report from the Investment Company Institute (ICI) shows that the overall retirement plan participation rate—which is a snapshot of how many workers are taking advantage of an employer plan at a single point in time—can misrepresent retirement preparedness. The reason, it says: Just because some workers aren’t participating in a plan today, doesn’t mean they won’t participate later in life.

American workers’ participation in employer-sponsored retirement plans is significantly higher than suggested by the most commonly cited statistics, with nearly two-thirds of workers between ages 26 and 64 participating in such plans, either directly or through a spouse, according to ICI’s “Who Participates in Retirement Plans, 2016.”

The participation rate rises to more than three-quarters if younger and lower-income workers—those who are the least likely to be able to or want to save for retirement—are removed from the analysis.

ICI explains that the need for a more reliable measure of retirement plan participation has increased given recent changes to the survey that provides the most commonly cited statistics on retirement plan participation, the Annual Social and Economic Supplement (ASEC) to the Current Population Survey (CPS). Comparisons with tax data suggest that the ASEC understated the participation rate by about 5 percentage points from 2008 to 2013. Between 2013 and 2016, the difference increased to 18 percentage points following a revision to the survey questionnaire used for the ASEC.

ICI used newly available data—tabulations of administrative tax data published by the Internal Revenue Service (IRS) Statistics of Income Division (SOI)—to analyze participation in employer-sponsored retirement plans. It found that among all workers ages 26 to 64 in 2016, 64% participated in a retirement plan either directly or through a spouse. That number ranged, however, from 55% of those ages 26 to 34 to 69% of those ages 45 to 64; and from 24% for those with adjusted gross income (AGI) less than $20,000 per person to 86% for those with AGI of $100,000 per person or more.

Younger and lower-income households are more likely to report that they save primarily for reasons other than retirement—for example, a home purchase, for the family, or education. Older and higher-earning workers are more likely to save primarily for retirement.

ICI points out that many of the younger and lower-income workers who do not participate in a retirement plan today will participate later in their working career, as younger workers do not remain young and many lower-income workers do not remain lower-income for their entire career.

“By the time they retire, the vast majority of American workers will accumulate resources in employer plans,” says ICI Senior Economic Adviser Peter Brady. “This is not well understood for two reasons. First, participation is often understated in household surveys … used to study participation. Second, many younger and lower-income workers who are not participating in retirement plans today will do so later in their careers.”