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Despite Improvements, Most Still Unprepared for Retirement

By Stephen Miller  7/16/2010
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With Americans living longer in retirement, the 2010 EBRI Retirement Readiness Rating shows that dramatically high percentages of Americans—even in the upper-income categories—are likely to run short of money after 10 or 20 years of retirement.

The new analysis by the nonpartisan Employee Benefit Research Institute (EBRI) finds that:

Almost two-thirds (64 percent) of Americans in the two lowest preretirement income levels will run short after 10 years in retirement.

After 20 years of retirement, almost a third (29 percent) of those in the next-to-highest income level will run short of money, as will more than 1 in 10 (13 percent) of those in the highest-income level.

Those with the highest income are at the lowest risk of running short of money—but many in the highest-income category still face significant risks of not being able to pay basic expenses and uninsured medical expenses for the remainder of their lives.

The EBRI Retirement Readiness Rating is based on a database of 24 million 401(k) participants in the U.S. Full results are available in the July 2010 EBRI Issue Brief.

“As the private-sector retirement plan system evolves from a largely paternalistic one to a system in which workers must make their own decisions, policymakers need to understand what percentage of the population is likely to fail to achieve retirement security under current conditions,” said EBRI Research Director Jack VanDerhei, principal author of the study. “Even more important is to identify which of those households still have time to modify their behavior to achieve retirement security and how they need to proceed.”

Those ‘At Risk’ by Age

EBRI's 2003 and 2010 Retirement Readiness Ratings provide a baseline projection of being “at risk” of having insufficient income to cover basic retirement expenses, as well as uninsured health care costs, for three age groups—early Boomers, late Boomers and Generation Xers.

On a positive note, the ratings show a significant decrease in the “at-risk” levels for all three groups between 2003 and 2010, with the largest decrease (12.9 percentage points) experienced by the Gen Xers: 




Early Boomers
(ages 56–62):

59.2% chance of being "at risk"

47.2% chance

Late Boomers
(ages 46–55):

54.7% chance

43.7% chance

Generation Xers
(ages 36–45):

57.4% chance

44.5% chance

Automatic Plans Improve Prospects

The lower "at-risk" levels are attributed to higher savings and growth projections for defined contribution account balances (which would have the largest impact on the youngest group). According to EBRI, this reflects the trend toward widespread adoption of automatic enrollment and auto-escalation of contributions, and the use of qualified default investments in 401(k) plans after enactment of the 2006 Pension Protection Act and subsequent regulations. These plan-design changes led to increased participation rates, earlier account accumulations and better long-term retirement preparation prospects—resulting in improved, but still insufficient, retirement readiness.

One recommendation: encourage employees 50 and older, who tend to be in their peak earning years, to take advantage of catch-up 401(k) contributions (an additional $5,500 in 2010 and 2011) that can bump up their retirement savings.

Vanguard: Don’t Be Afraid to Set the Deferral Rate
at 6 Percent


Deciding on a default deferral rate for automatically enrolled 401(k) plan participants can be tricky for plan sponsors, according to a research commentary from Vanguard Investments. But the firm says its research shows that a higher default deferral rate doesn’t seem to increase the opt-out rate among new hires.


In Vanguard-managed defined contribution plans with voluntary enrollment, participants have an average deferral rate of more than 6 percent. But because the dominant default deferral rate for autopilot plans is 3 percent, new participants in these plans have an average deferral rate of just 3.7 percent. These participants will lag behind their voluntary counterparts in accumulated savings over time, according to Vanguard.

When plan sponsors adopt an autopilot plan design, Vanguard recommends starting participants at a 4 to 6 percent deferral rate—preferably 6 percent—with 2 percentage point annual increases, capping automatic deferral rates at 15 to 20 percent.

Stephen Miller is an online editor/manager for SHRM.

Related Articles:

Plan Participants Confused About Retirement Fundamentals, SHRM Online Benefits Discipline, July 2010

Most Big Employers Auto Enroll, Restore 401(k) Match, SHRM Online Benefits Discipline, July 2010

Social Security Averages Just 40% of Elderly Income, SHRM Online Benefits Discipline, June 2010

Analyze Retirement Plan Participants by Their Needs, Report Advises, SHRM Online Benefits Discipline, May 2010

Pre-retirees Lag on Transition Planning, SHRM Online Benefits Discipline, May 2010

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