Specific Actions Lead to Higher Retirement Income

Empower identified “habits of success” that correlate with higher projected retirement income—saving in a workplace retirement plan, saving at a higher level and having a formal plan for retirement.

Empower has identified specific employee actions—which it calls “habits of success”—that correlate with significantly higher projected lifetime income when working years end.

In a white paper, “Scoring the Progress of Retirement Savers,” it says plan sponsors can foster these behaviors through various plan features, tools and access to professional advice.

In Empower’s seventh study of how financially prepared Americans are for retirement, it found continuing improvement in many factors affecting lifetime income replacement percentages. The median projected income replacement among participants in its study was 64%. In other words, Americans are on track to replace 64% of their current income in retirement. However, Empower found a wide gap between those who have “habits of success” and those who don’t.

Two-thirds (67%) of households in Empower’s study report that at least one earner has a workplace retirement savings plan available. Participants who are eligible for a defined contribution (DC) plan and actively contributing have a median income replacement percentage of 79% compared to only 45% for those without access. The difference between current savers versus those who are eligible but not participating is significant. Current savers have a median income replacement percentage that is 25 percentage points above those who are eligible but not active in their plans.


The second major factor in generating a strong level of income replacement at retirement is how much a participant is contributing, Empower says. Its study found participants who contribute less than 3% of pay have a median lifetime income replacement percentage of less than 60%, while those who contribute 10% or more have a median retirement income replacement of more than 100%.


Empower suggests several steps plan sponsors can take to help facilitate savings—and higher levels of savings—within a plan. The first is automatic enrollment. Empower found an 11-point difference in median income replacement percentages between participants who enrolled automatically versus those who opted into the plan. A second feature that correlates with higher median income replacement is auto-escalation. The survey found that people who participate in a plan with this feature achieve a median retirement income replacement of 107%, 27 percentage points higher than participants in plans without it.


An employer match also affects employees’ saving behaviors—not only the fact there is a match, but the degree to which employees know what the match level is. Of those who know their match in the plan, 73% (56% of total survey participants) set their contributions accordingly. Empower says the opportunity area lies in the group that doesn’t know what their match level is. If these employees were more knowledgeable, they might well make different savings decisions to take full advantage of the match feature.


Empower explored what factors keep employees from participating when a plan is available—and what would have them begin or resume contributing. The greatest factor in beginning or resuming contributions cited was paying down debt (32%), followed by getting a raise (22%) and then reducing overall spending (12%).


Among participants who have access to an employer-provided savings plan, confidence that they are making the most of the plan to build retirement income is at a four-year high at 79%. In addition, among those who have a target retirement income (91% of survey participants), 57% are confident that they will be able to achieve that target income in retirement. Empower found that participants who are confident in various aspects of their retirement planning have projected income replacement results well above the survey median. “While the data only indicate correlation, not causality, the numbers suggest an opportunity area for employers. By offering planning support and tools that give employees a clear view of how much income they’re on track to replace—and how to generate better results for themselves—plan sponsors can better enable employee action and confidence in the future,” the white paper says.


Employees expressed interest in more personalized support for retirement planning and decision-making through their plans. With managed accounts, for example, an employee can work with a financial specialist on goal-setting, savings and investing strategies, approaches to minimize taxes on withdrawals, and effective responses to changing economic conditions. The majority of employees in the study—between 80% and 88%—find such features somewhat or very attractive.


The study also found those who have an adviser are more likely to be on track to create adequate retirement income—by a wide margin. Those who have a paid adviser have a median retirement progress score of 91% compared to only 58% for those without an adviser. The data indicates that one of the most important functions of a financial adviser is the creation of a formal financial plan. Those who have a formal plan have a median projected income replacement of 99%, while those without a formal plan are on track to achieve a median replacement level of only 58%.


Given the public debate regarding tax reform, Empower asked employees about the importance of the current tax treatment to their plan savings decisions. Individuals strongly value the pre-tax treatment of their employer-provided DC plan, and these benefits have a direct impact on contribution levels. At almost any level of current contribution, employees say they would contribute less if the tax benefit were not available. In total, the responses suggest adjusting taxes on retirement savings contributions would reduce deferrals by nearly 20%. Respondents earning less than $50,000 annually predicted a greater percentage drop in contributions (28%) compared to those earning $50,000 or more, should tax benefits alter.