Employers Are Increasing Retirement Contributions, But Not Enough

401k

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The average employer contributes $3,620 per year to an employee’s retirement account. That’s up from about $2,800 in 2007, according to a report in Bloomberg. The numbers come from Fidelity Investments, the largest provider of retirement plans in America.

More generous employers is good news for workers, many of whom saw employer matching contributions slashed in the wake of the Great Recession.

“How much an individual contributes to their retirement savings is one of the most critical factors in retirement readiness,” said Jim MacDonald, president, Workplace Investing, Fidelity Investments, in a statement. “[A]ny increase in savings — even by 1% a year — can have a positive impact on long-term retirement success.”

Fidelity’s data suggests that many retirement savers are getting that message. Not only are matching contributions up, but so are individual savings rates. The average plan participant is saving 8.1% of their salary and receiving a 4.4% match on top of that, for total annual contributions of 12.5%. That’s close to the 15% of income that the Center for Retirement Research at Boston College recommends that the average family save. Even better, almost a quarter of people upped their contribution rate in the last year.

Still, the overall outlook for Americans’ retirement is pretty grim. Despite the uptick in benefits for some workers, many people are likely to face a big shortfall when it comes to their total retirement savings. Only about 41% of people participated in a retirement plan at work in 2013, according to the Employee Benefit Research Institute (EBRI). Some people simply choose not to save, but 67.9 million Americans have jobs that don’t offer retirement benefits, EBRI says. Those people can, in theory at least, contribute to an IRA or open up a myRA (the Obama administration’s new retirement account), but that may not be enough to close the gap.

Source: Thinkstock

Source: Thinkstock

Even companies that do offer retirement benefits usually aren’t doing enough to encourage people to save. Only a third of employers that Fidelity works with automatically enroll new workers. An even smaller number — 13% — automatically increase employee contribution rates. Automatic enrollment has been shown to boost retirement plan participation, NPR reported.

When employees are automatically enrolled in a 401(k) or similar retirement plan, default contribution rates are usually low. Just over 3% of annual salary is a common figure, according to a study by the Center for Retirement Research (CCR). That’s far less than most people really need to save, say retirement experts. And many people won’t increase their savings rates on their own.

Employers who automatically enroll employees in a plan also tend to offer slightly lower matching contributions, CCR researchers found. Some companies may even set default contribution percentages lower than their matching percentage as a way to reduce overall retirement plan costs. Both moves mean that workers may end up saving less for retirement.

“Auto-enrollment policies are very successful at raising participation rates but may not boost workers’ total retirement saving if firms aim to keep their 401(k) compensation costs at a constant level,” the study’s authors noted.

The good news is that many employers seem to realize that they could be doing more to help their employees get ready for retirement. Seventy-five percent of employers surveyed by Aon Hewitt said they were likely to reevaluate their overall retirement plan design in 2015 to make sure that it’s appropriate for their employees. An equal number said they were likely to introduce new programs that would address employees’ retirement savings gaps.

Specific actions that employers said they were likely to take included encouraging people to increase their contribution rates and improving investment diversification. That may help get workers closer to their retirement goals, but until people actually start saving more, either on their own or with the help of their employer, it may not be enough.

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