Rising Medical Costs Threaten Retirement Savings

June 28, 2004 (PLANSPONSOR.com) - Retirees need to have even more money stashed away to provide for a comfortable retirement, but participants are faced with increased costs and reduced retirement savings making this task more difficult.

Hewitt Associates found that while retirees will need to provide an annual income equal to roughly 85% to 95% of their preretirement level, including Social Security and their own savings, a large chunk of retirement plan participants fall short, mostly along employer-sponsored pension plan lines. While those employees who have a company sponsored pension plan and participate in their company’s 401(k) plan expect to replace 107.9% of their preretirement income, those participants with only a 401(k) plan expect to replace only 80% of those income levels.

Even more precarious is the position of employees that ignore their 401(k) plan. Hewitt’s examination of 1 million employees at 62 U.S. companies found K plans are projected to provide 51.4% of the retirement income available to employees, yet more than three out of 10 workers eligible to participate choose not too.

In addition to workers not saving, and not saving enough, Hewitt sees more trouble up ahead in the form of increasing retiree medical costs and the erosion of pension programs. The study found r etiree medical costs may consume an annual amount equal to 20% of preretirement income for those employees who retire at age 65 with no employer subsidy. This is even direr to employees who retire early. Because of the high cost of medical coverage before Medicare eligibility, a typical worker retiring at age 62 who does not have any subsidized retiree medical benefits is projected to replace only 59% of their preretirement income.

Employees are increasingly faced with going it alone in paying for these increased costs as the number of employers offering defined benefit plans continues to decline. Hewitt found only 68% of employers offered defined benefit plans in 2003, down from 85% in 1990, and Hewitt anticipates that this percentage will continue to drop.

Constructive Ideas

Retirement hope is not lost. To assist plan sponsors to better prepare participants for a comfortable retirement, the firm offers some tips employers can pass on to their staff:

  • show employees the complete picture – reinforce to employees that saving for retirement is a shared responsibility
  • create a sense of urgency and relevance – personalize communications to speak to individual situations to employees can better understand the impact of their decision making
  • make it easy for employees to participate and contribute to 401(k) plans – one suggestion offered by Hewitt it to offer features such as contribution escalation
  • support employees in their decision making – consider providing decision support tools at each point of need
  • understand current and future retirement costs – manage fees to ensure they are reasonable is a key fiduciary duty for employers; reducing those fees can have a positive impact on employees’ retirement savings
  • consider phased retirement programs – set up programs that allow employees to reduce the number of hours they work toward the end of their career.

Further, Hewitt said retiring at 67 and contributing an additional 2% of savings to a 401(k) plan can provide a boost to retirement income. Even after factoring in retiree medical costs, Hewitt found this strategy boosted replacement income rates in excess of 80% for half of the employees without a company sponsored pension plan.

Copies of the full report, “Total Retirement Income at Large Companies: The Real Deal,” are available by contacting the Hewitt Information Desk at (847) 295-5000.