UNEMPLOYMENT
INSURANCE / SOCIAL SECURITY
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New research recently released by Hewitt Associates highlights the importance of employee contributions to 401(k) plans. The Hewitt study looked at the estimated retirement levels of almost two million employees at 72 large U.S. companies, and concluded that less than one in five workers will be able to meet 100 percent of their retirement needs. Additionally, more than 67 percent of employees (12 million) are expected to have less than 80 percent of their projected needs met at retirement. According to Hewitt, employees will generally need to replace 126 percent of their final salaries when they retire.
Hewitt points to rising medical costs, longer life expectancies, and fewer employer-sponsored pension and retiree medical plans as the source of an increasing gap between savings necessary to maintain an employee's standard of living in retirement and what their retirement plans will most likely provide. That gap can be lessened by contributions to 401(k) plans and by small improvements in workers' savings and investing habits, Hewitt says.
For example, Hewitt estimates that employees who contribute an average of eight percent of pay to their 401(k) plan can replace 96 percent of their pre-retirement income at age 65. This would provide approximately 80 percent of income necessary to provide the same standard of living during retirement. Employees who do not contribute to 401(k) plans will have 40 percent of their projected needs met. Hewitt's research shows that 26 percent of employees do not participate in their employer's 401(k) plans. Furthermore, 61 percent of the employees that do contribute to 401(k) plans contribute less than seven percent per year.
Save, cut spending, or work longer. According to Alison Borland, defined contribution consulting practice leader at Hewitt Associates, "Without changes in behavior, most workers will either need to significantly reduce their spending or work longer in order to have enough to last through retirement." She adds that, "While the availability of Medicare - including the new Medicare prescription drug coverage - represents a substantial asset available toward meeting postretirement medical needs, medical inflation and declining employer subsidies for retiree health benefits can quickly erode the retirement income level generated by 401(k) and pension plans."
According to an illustration provided by Hewitt, an employee who retired last year would need an average of $80,000 in savings to pay for future expected medical expenses alone that are not covered by Medicare, but Hewitt's research reveals that, for employees 60 and older, the median 401(k) plan balance is just over $34,000.
Hewitt also warns participants to pay attention to plan fees. For younger employees, additional plan fee expenses of just 0.25 percent can reduce their 401(k) plan retirement income by nearly six percent. These plan fee expenses represent the difference between the typical institutional fund and retail mutual fund portfolio. Says Borland, ". . . switching to a lower cost investment fund can mean an increase of thousands of dollars by the time an employee reaches retirement age."
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