For Your Benefit

HR Urged to Create Investors
Saving employees from themselves is a change in thought.
By Patty Kujawa
Saving employees from themselves is a change in thought.

articipants who think they need $1.7 million to be comfortable in retirement may not be saving enough to hit that mark, a new survey from Schwab Retirement Plan Services found.

The online survey of 1,000 401(k) participants showed the average respondent thought they would need to save $1.7 million for retirement. The same report also showed the average participant contributed less than $9,000 to their 401(k) in 2018.

The fact that people are thinking about how much they will need in retirement is good progress, said Nathan Voris, managing director of business strategies for Schwab. While Voris said he was surprised by how good the $1.7 million mark was, some of the improvements to 401(k)s like automatic features are creating a bit of a backlash.

The “set it and forget it” mentality associated with automatic enrollment and escalation can create a false sense of security, Voris said. It’s a great thing for people to be defaulted into a 401(k), but the minimum 3 percent contribution that is used by many plans won’t allow those participants to get to $1.7 million.

“The unintended consequence is you may think you are fine and you’re not,” Voris said. “We’ve learned a lot about what works, but we still have a lot to do.”

Rob Austin, head of research at Alight Solutions, crunched some numbers to see how workers can get to $1.7 million. It would take roughly 33 years for someone to save $1.7 million if they saved $9,000 this year, increased contributions by 2 percent annually, and had an employer match half of contributions. This would assume a 6 percent rate of return annually.

Schwab noted that people who start saving in their 20s should save between 10 to 15 percent annually to have a comfortable retirement. Workers who wait until age 45 may need to save as much as 35 percent of their annual salary to achieve a reasonable retirement amount.

Austin said that while it is good to set a goal like saving $1.7 million, the real number should hinge on a person’s unique financial situation. Annual income, additional sources of savings, debt and other reoccurring costs should be factored in when setting a retirement amount goal.

“It’s tough to make a blanket statement,” he said. “But it’s good to set a goal.”

Voris and Austin agreed that HR leaders can play a role in helping participants set realistic retirement goals. Voris said that it starts by helping participants understand that they are not just savers but investors. In the survey, two-thirds of respondents said their 401(k) has been their first experience investing; more than half consider themselves as savers.

In addition, nearly 60 percent said their 401(k) is their only or largest source of retirement savings. More than half said they would be more likely to use a savings account for their retirement dollars. Only 46 percent said they would use an Individual Retirement Account.

That mindset may lead participants to invest too conservatively, Voris said. They should understand that by having a 401(k) plan, they are investors.

“It is a tough nut to crack,” Austin said. “People are saving, but it’s their first time, so they are rookies. The question becomes, how do you convert savers into investors.”