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New research: American workers aren't prepared for retirement
Industry trends Retirement wellness

New research: American workers aren't prepared for retirement

Jeff Rosenberger, PhD

Our new survey shows that workers lack both investment knowledge and adequate opportunities to save for the future.

The gold watch, the condo in Florida, and other trappings of a comfortable retirement are falling out of reach for many Americans. This fall, Guideline conducted a survey of nearly 1,500 US workers. The results show that only 48% of respondents are either somewhat, or very confident, that they’ll be able to retire comfortably someday. The major barriers? A shortage of investment opportunities and lack of knowledge about how to invest.

Americans’ pessimistic outlook isn’t surprising: Research by the Economic Policy Institute shows that only about half of workers have any retirement savings, and the average savings for couples approaching retirement is just $17,000.

Workers whose employers sponsor a retirement plan feel more positive about retirement. Only 32% of employees who are not offered a retirement plan express confidence in their ability to retire comfortably. That number jumps to 54% when employers offer retirement benefits — and 82% of eligible employees participate in the offered plan. It's not surprising that workers say a retirement plan is one of the two benefits they want the most.

But what motivates workers to participate in a retirement plan? The primary reason is “free money” from employer matching contributions. The second most common reason to participate is the ease of investing through an employer-sponsored plan.


Among employees whose employers don’t offer a plan, 60% say they would participate if a 401(k) plan was offered. Sixty one percent cite the ease of investing as the primary reason they would participate in a plan, if offered. Interestingly, workers do not see the tax benefits of a retirement plan as a primary reason to participate: less than 12% of workers said tax savings would be their primary motivation.

The lack of interest in tax savings may be indicative of an overall lack of understanding about how retirement plans work. For example, only 27% of participants know that there are fees associated with their retirement accounts, even though average annual fees for a small business 401(k) are around 1.14% of plan assets.

Low Fee 401k Plan Performance
The graph above is hypothetical and does not represent actual performance results of Guideline’s portfolios. It is provided for illustrative purposes only and is not intended to constitute investment advice nor an assurance or guarantee of future performance. Investing involves risk of substantial loss as investments may lose value.
The returns presented in the graph above are based on the historical performance of the S&P 500 index, and represent returns for time periods that preceded Guideline’s existence. As such, they may not reflect the impact that material economic and market factors might have had on Guideline’s decision-making if Guideline was managing portfolios during such time periods. The returns presented represent the hypothetical returns achieved by two funds achieving the same underlying performance, net of management fees of 1.14% and 0.06%.
* $2581 represents the average annual contributions made to defined contribution plans by US employees in 2016, based on deferral data from 2017 T. Rowe Price “Reference Point” benchmarks and median income data from the US Census Bureau. 40 years represents the length of a career that begins after college and ends with social security eligibility. 7.6% annual returns are based on the historical performance of the S&P 500 and its predecessor indices from December 31, 1928 to December 29, 2017. 1.14% represents the average assets under management (AUM) fees of 401(k) providers with $1 million to $10 million in AUM based on a 2018 Brightscope/ICI study of 401(k) plans. 0.06% represents the the blended AUM fees for index funds in Guideline’s managed portfolios.

The impact of these fees can reduce the assets in an employee’s retirement account significantly over the course of their career. Nonetheless, only 42% of workers think the average fee paid by participants in a 401(k) plan is somewhat or very unfair.

The opportunity for employers

Employees with a retirement plan tend to be happier with their employers. For example, employees who are offered a plan are almost twice as likely to be satisfied with their overall benefits package than those without a plan (71% vs 38%). Offering a retirement plan also correlates with improved employee retention. Thirty one percent of workers who aren’t offered a plan said they were likely to look for a new job in the next 12 months, compared to just 21% of employees who have access to a plan. Filling a vacancy is estimated to cost about one-fifth of an employee's wages, so improved retention can have a meaningful impact on your bottom line.

And employees are even open to the idea of having some of their income invested automatically. We found little resistance to the idea of plans with auto-enrollment (employees are automatically signed up for a retirement plan, unless they choose to opt out). Only 13% of workers said they would be “very unhappy” if 3% to 6% of each paycheck was automatically placed in a retirement account. And 46% said they would be somewhat or very happy with the idea of being automatically enrolled in a retirement plan.

Outside of the findings in our survey, it does look like help is on the way for American workers. Some other new research suggests that more employers are encouraging employees to participate in existing plans by offering more generous matching contributions. Around 80% of employees take full advantage of matching 401(k) contributions when employers offer them.

This survey was conducted online in October 2017, using a panel of 1257 employed US residents provided by SurveyMonkey Audience. “Employed” workers include respondents who defined themselves as “employed full time,” “employed part time,” or “self-employed with employees.” Respondents who were unemployed, retired, independent contractors, or self-employed without employees were excluded from the results.*

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