By Paula Aven Gladych
Continued savings by employees and a stronger return on assets has helped U.S. workers begin closing the gap between what they have saved and what they will need in retirement.
Aon Hewitt’s “The Real Deal: 2012 Retirement Income Adequacy at Large Companies” found that when factoring in inflation and postretirement health care costs, employees will need 11 times their final pay in retirement resources, such as company-sponsored plans and personal savings.
The report looked at the projected retirement levels of 2.2 million employees at 78 large U.S. companies, which showed that, on average, full-career contributing employees are on track to accumulate 8.8 times their final pay, leaving a shortfall. This is an improvement over 2010, which the shortfall was 2.4 times pay.
The report also found that people who relied solely on defined contribution plans to fund their retirement were making similar progress, reducing their shortfall from 4.3 times pay in 2010 to 3.8 times pay.
Aon Hewitt’s research also found that the average before-tax contribution to a retirement account was 7.2 percent of pay, which means that less than 30 percent of full-career employees are on track to achieve adequate retirement income. Many employees are still passive when it comes to retirement savings, with only 15 percent of participants initiating trades in 2011, down from 20 percent in 2008 and prior years.
"It is encouraging to see that the continued efforts by employers and employees to increase retirement income security may be paying off," said Rob Reiskytl, leader of Retirement Plan Strategy and Design at Aon Hewitt. "To further improve results, employers should design their 401(k) plans in a way that harnesses inertia, such as matching at higher rates of savings and combining automatic enrollment with automatic contribution escalation for all employees. Ideal solutions will improve outcomes with little or no increase in employer cost."
It is on the shoulders of the employee to save enough for retirement, according to the research. If a person is not covered by a pension plan, an employee who begins saving at age 25 and targets 11 times pay at retirement needs a combined employer and employee contribution rate of 12 to 18 percent a year, or 15 percent on average, to build up adequate retirement income by age 65. That total increases if an employee doesn’t start saving for retirement until much later.
Aon Hewitt found that automatic enrollment and escalation tools play a strong role in helping employees save for retirement. It found that employees who are automatically enrolled in their defined contribution plan have an average savings rate of 6.7 percent, which is a full percentage point below those who are not subject to automatic enrollment.
These workers also are much more likely to miss out on employer matching contributions. Thirty-nine percent of automatic enrollees save below the match threshold vs. just 25 percent of other savers, the report found.
"Automatically enrolling employees at a higher rate of pay and combining this with automatic contribution escalation can provide a strong foundation for adequate future retirement income," Patti Balthazor Bjork, Aon Hewitt's director of Retirement Research. "Employers also should strongly consider sweeping in eligible non-participants periodically. Other alternatives include quick-enrollment tools and using education and communication opportunities to influence savings levels and highlight the availability of automatic escalation."
Aon Hewitt partners with organizations to solve their most complex benefits, talent and related financial challenges, and improve business performance.
Originally published on BenefitsPro.com