Reports of the death of retirement savings greatly exaggerated

New data reveal more cash stashed away than thought; plan sponsors wising up

Mar 7, 2013 @ 10:55 am

By Mary Beth Franklin

When it comes to advances in the rate of retirement savings, progress is not readily observed with the naked eye. Thus, when data show that things actually might be improving, it's worth jotting down.

To wit: In a new report, Fidelity Investments suggested that Americans may be saving more for retirement than previous surveys have indicated.

When analyzing account balances of investors that have both a workplace savings plan and an individual retirement account at Fidelity, the company found a combined average balance of $225,600 as of December 2012, nearly three times higher than the average Fidelity 401(k) balance of $77,300.

“By maximizing the long-term, tax-advantaged growth potential of both workplace savings plans and IRAs, investors can create a personalized plan to help them achieve better outcomes in retirement,” said James MacDonald, president of Fidelity Workplace Investing.

The analysis also examined the savings rate of investors across multiple age ranges and found that average combined contribution levels peaked at $13,100 a year for investors in their 50s. The increase was attributed to both higher income levels of older workers and the ability to make catch-up contributions beginning at 50.

While American workers still have a long way to go in achieving their retirement savings goals, the report demonstrates progress — and as such, likely will serve as ammunition in the coming battle over the adequacy of the nation's voluntary-retirement system.

Indeed, another report suggests that much-maligned defined-contribution plans actually are better than what they've replaced. According to the Investment Company Institute, the trade association for the mutual fund industry, in 2010, about 80% of near-retiree households had accrued benefits in employer-sponsored retirement plans or IRAs. The ICI found that the shift from traditional defined-benefit pension plans to defined-contribution plans such as 401(k)s and IRAs will increase retirement resources for most households because the plans are better suited to the mobile U.S. workforce.

It also appears that plan sponsors are getting better at enforcing savings. In a report released today, Bank of America Merrill Lynch noted that more than half of the employers who use automatic enrollment in 401(k) plans that are administered by BofA are now also using automatic increases to boost participants' savings rates. The bank's proprietary 401(k) business includes 2.5 million participants and more than $98 billion in assets.

The dynamic combination of auto-enrollment, paired with automatic increases in employee deferral rates, has long been recommended as the magic bullet to improve both employee participation and savings rates. Even more significant, Bank of America Merrill Lynch reported a 60% increase in the number of plans using default contribution rates of 6% or more. That's twice the typical default contribution level when employees are automatically enrolled in their employer plan.

While automatic 401(k) features generally have been deemed successful, the main criticism has been that the initial deferral rates are too low. Without higher savings levels, most plan participants would never reach the recommended 13% to 15% of savings — including employer matches — needed to replace sufficient income in retirement.

But it's not just the “what” that's so impressive about the Bank of America Merrill Lynch report; it's the “how.”

In 2007, the company introduced a simple yet innovative approach to help employees become more engaged with either retirement benefits: BofA synchronized 401(k) enrollment and annual health care open enrollment. When plan sponsors presented employees with an easy one-click option to enroll in a 401(k) plan or to change their contribution level during the annual health benefit process, plan participation and contributions jumped dramatically.

Throughout 2012, nearly 1 million employees started or boosted contributions to their 401(k) plans — a 6% increase from 2011 and a 9% improvement over 2010.

“[Human resources] professionals and financial services providers must continue to work together to protect and improve our retirement system,” said Kevin Crain, head of Institutional Retirement and Benefit Services at Bank of America Merrill Lynch. “By empowering employees to get the most out of their plans, they can take greater control of their financial future.”

Improved plan design and participant outcomes present a great opportunity for advisers, too, said Michael Liersch, director of behavioral finance for Bank of America Merrill Lynch. “First, advisers need to educate themselves about all the innovations in plan design and options,” Mr. Liersch said. “Then they need to understand what the plan sponsor is trying to accomplish,” he explained. “By listening to plan sponsors and being able to deliver what they are trying to accomplish, advisers can differentiate themselves from the competition.”

When advisers are doing their job educating employees and making the plan more successful, they should be proud to tell their clients about the value they add to the plan, Mr. Crain added. “Fee disclosure shouldn't scare them.”

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