A member of Congress famously characterized federal spending as, “a billion here, a billion there, (and) pretty soon, you’re talking real money.”
The observation reflects America’s efforts at retirement saving as the Employee Benefit Research Institute (EBRI) recently announced its latest Retirement Readiness Rating, reporting that the percentage of American households that are expected to have enough money throughout retirement rose to 59.4 percent, up 1.7 percentage points from 2014. In aggregate dollars, EBRI reported, the improvement in savings is more than $500 billion.
That figure represents a reduction in the retirement gap that measures how many dollars retiree households need to avoid running out of money. The aggregate retirement deficit of American households in which the head of the household is between ages 35 and 54 is estimated to be $3.83 trillion, including Social Security Benefits, according to EBRI. The aggregate figure improved by 15.9 percent from 2014.
So what can we attribute to the improvement? Have American households suddenly become enamored of saving? Are lottery winners stuffing 401(k)s with money?
It seems the primary reasons for Americans catching up on their retirement savings may be attributed to new strategies embraced by employers and financial advisors in designing effective retirement plans. A 2018 Willis Towers Watson survey 1 of employers revealed a widespread increase in automatic savings features and matching contributions in retirement plans:
- 73 percent of employers now automatically enroll new participants in retirement plans, rising from 68 percent in 2014.
- 60 percent of employers now automatically escalate participant contributions, up from 54 percent in 2014.
- 25 percent of employers have reported rising retirement plan contributions in the past five years. Among those plan sponsors, 60 percent increased matching contributions and 51 percent encouraged employees to contribute more.
Yet, there is more that can be done and potentially more help from Congress on the horizon.
Congressman Richard Neal (D-Springfield), chairman of the House Ways & Means Committee, has proposed legislation that would require employers without retirement plans to provide workers with access to a payroll deduction for savings through an IRA, 401(k), or other qualified retirement savings plan. In a major policy, the Board of the American Council of Life Insurers recently announced support for the legislation2. The bill would increase the number of people with access to retirement plans by at least 22 million, according to the ACLI.
Meanwhile, financial advisors and employers can continue to encourage employees to pull existing levers to feather their retirement nests:
1. Maximize the match. Many retirement plan participants don’t take advantage of their employer’s matching contributions or don’t save enough to take advantage of the full match. Promoting the match encourages employees to take advantage of “extra money” and significantly boost their retirement savings.
2. Play catch-up. While EBRI’s findings show a positive trend, many mature workers have the opportunity to turbocharge their retirement savings through the catch-up provision. Retirement plan participants age 50 or older, in 2019, can contribute an additional $6,000 annually to their 401(k) or other defined contribution retirement plan in addition to the $19,000 annual limit. Another $6,000 a year until retirement can yield an additional $90,000 at age 65 before any investment earnings ($6,000 X 15 years = $90,000).
3. Conduct a gap analysis. Many plan sponsors and recordkeepers such as MassMutual offer tools to help retirement plan participants gauge their relative readiness for retirement based on their projected retirement income and expenses. The earlier savers get a handle on their situation, the better able they are to make effective adjustments to reach their retirement goals.
4. Work with a financial professional. While tools are helpful, they cannot replace the deeper insights provided by financial advisors. Advisors who work with retirement savings plans have an opportunity to connect with more people and potentially provide valuable education and guidance for workers throughout the retirement planning journey.
If continued efforts to promote retirement savings and retirement plans could shrink the existing $3.83 trillion retirement gap by another 5 percent, retirees would have access to an additional $190 billion in additional retirement savings. A billion here, a billion there, and pretty soon you’re talking real retirements.
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1 Willis Towers Watson, “U.S. employers enhancing defined contribution retirement plans to help improve workers’ financial security,” February 2018.
2 The American Council of Life Insurers, “Life Insurers Endorse Bold Solution To Close The Retirement Savings Gap,” March 12, 2019.