401(k) Participants Focus on Funds, Not Contribution Level

Skewed priorities may be limiting long-term savings prospects

By Stephen Miller, CEBS Mar 20, 2015

About three-quarters of employed U.S. adults with investments said their employer offers a 401(k) or similar plan, and of these, 89 percent participate in the plan. The majority of those in a 401(k) or similar plan—64 percent—said they can manage their plan by themselves, but 35 percent said they need advice from others, according to a survey of investors by financial firm Wells Fargo and Gallup, conducted from Jan. 30 to Feb. 9, 2015.

When asked which aspects of investing they most need advice on:

32 percent of 401(k) investors want help knowing which funds to invest in.

29 percent want help knowing whether to reallocate their investments according to changing conditions.

Lower on the list is deciding how much to contribute (8 percent of respondents), although research suggests that even a 1 percent monthly increase in 401(k) contributions can translate into a substantially larger monthly retirement paycheck.

The survey findings highlight that participants may be focusing too much on fund selection and not enough on the value of increasing their contribution level.

“Most Generation X workers are currently saving for retirement but many are not saving enough,” said Catherine Collinson, president of the nonprofit Transamerica Center for Retirement Studies, which recently released a report on retirement preparedness. “Eighty-four percent of Gen Xers who are offered a 401(k) or similar plan participate in that plan at an annual contribution rate of 7 percent (median),” Collinson told SHRM Online. “Increasing retirement plan contributions from the current level of 7 percent of annual pay to 10, 12 or even 15 percent can profoundly increase the size of their nest eggs at retirement.”

Face Time vs. Online

When the Wells Fargo/Gallup survey asked about the ways in which employers provide employees information about managing their 401(k), plan participants ranked the top three as:

One-on-one meetings with a financial professional (71 percent of respondents).

Attending a seminar or formal presentation (46 percent).

Information posted on the company website (40 percent).

“These plans are designed to be self-directed, but one out of three participants is saying ‘Someone help me,’ said Joe Ready, director of Wells Fargo Institutional Retirement and Trust, in a news release. Plan sponsors and administrators should understand participants’ needs “and help provide people with useful tools and advice that ensure all investors are making the most of their plans.”

Millennials: Saving Early but Not Saving Enough

New research by the Principal Financial Group shows that the majority of employed millennials aren’t saving enough now in order to enjoy a comfortable retirement later. Findings from the firm’s 2015 survey of millennial workers showed that 63 percent report they started saving for retirement before age 25, but less than a third are saving at least 10 percent of their salary through their employer-sponsored retirement plan.

“Just as important as saving early is saving enough, said Jerry Patterson, senior vice president of retirement and investor services at The Principal. “Our analysis over the years has found that saving 10 percent of your salary, plus any employer match, over the course of a working career is the key to achieving a more secure retirement.”

According to survey, 83 percent of millennials take full advantage of matching contributions when offered through their employer-sponsored retirement plan.

“The employer match is a valuable and important incentive to get millennials saving, but the amount of the match is not a signal to stop saving,” said Patterson. “Most matching formulas phase out once an employee reaches a savings level of 3 or 4 percent of pay—well short of the 10 percent experts indicate they should be saving. One easy remedy is for plan sponsors to encourage employees to save at a higher rate by ‘stretching the match’.”

Retirement vs. Everything Else

Saving for retirement competes with many big-budget items for millennials. When asked to list their three largest budget items, it may come as no surprise that the top answers were mortgage/rent (65 percent), food (38 percent) and car/transportation (30 percent). Other major expenditures included basic expenses (27 percent), student loans (20 percent) and credit card debt (16 percent).

“Many millennials may see these large expenses—especially student loans and other debt—as primary obstacles to saving anything for retirement,” Patterson said. “But in most situations, it’s possible and necessary to both save for retirement and pay down debt by creating a plan and sticking to it.”

The Principal Financial Group Millennial Research Study was conducted within the U.S. in October and December 2014. Respondents to the survey were 867 American workers ages 23-35.

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.​

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