Despite widespread prophecies about the impending collapse of the Social Security system and the retirement savings crisis to come, many Americans have yet to take full responsibility for saving for their post-work years.
Four surveys focusing on defined contribution plan issues identify a worker population that is surprisingly confident about their living standards in retirement, despite a lack of planning and appropriate use of employer-sponsored savings plans, especially among low-paid workers.
The most comprehensive survey was conducted by the public policy think tank Public Agenda, with data from the Employee Benefit Research Institute. Both groups are in Washington.
The survey uncovered an interesting dichotomy: While business and retirement experts think retirement planning is a serious policy issue and that Americans are not saving enough, workers themselves have high expectations of retirement and confidence in their ability to achieve their goal. Despite the optimism, many employees actually have saved too little to meet their retirement needs.
In-depth interviews were conducted with retirement experts from academia, government, media and business. Two attitudinal surveys also were undertaken, one of 1,100 randomly selected non-retired Americans and a mail survey of 450 decision-makers in business, government and academia. Data from EBRI's mid-1994 retirement attitudes survey also was included in the analysis.
Six in 10 leaders ranked retirement as an important national policy issue, and seven in 10 said future retirees will be financially impaired, compared with current retirees.
Leaders were almost unanimous in their opinion that Americans should be saving more for retirement. Nearly every leader interviewed, 96%, thought the typical American family does a fair to poor job of saving and planning for retirement.
Such pessimism from retirement experts is borne out by individual savings rates. More workers, 46%, said they are saving more for retirement than for any other purpose. But one-fifth of individuals surveyed had saved nothing to date for retirement in any type of investment vehicle. Another 13% have saved so little - $1,000 to $9,000 - that it will have little effect on future retirement standards.
Contrary to commonly held opinion, low savings rates are not confined to lower paid or younger employees. A significant proportion of respondents - 39%, from middle-income households between $25,000 and $40,000 and 23%, with higher incomes between $40,000 and $60,000 - have less than $10,000 in retirement saving.
Even more alarming is the 35% of respondents in the middle-income bracket who are 40 to 49 years old and have nothing or very little set aside for retirement.
The survey authors indicated the savings estimates probably are conservative. The percentage of respondents spanning income and age categories who have nothing or little saved for retirement is probably higher, because 48% of the survey sample did not know or refused to disclose how much they had saved for retirement. The authors note the savings figures do not include the value of real estate holdings as part of retirement wealth, and they conceded many retirees draw upon real estate equity.
Americans most at risk of retiring with inadequate savings are the 52% of younger workers between 22 and 29 who have between nothing and $9,000 squirreled away.
Unexpectedly, one-third of baby boomers between 30 and 49 have saved less than $10,000 for retirement; 49% did not know how much they had or refused to give their total.
Lower-income workers save the least among those surveyed. Six in 10 respondents with household incomes of less than $25,000 have nothing or less than $9,000 saved.
Nest egg attitudes
A retirement attitude study by the Equitable Life Assurance Society, New York, also found Americans to be mostly optimistic and confident about their retirement future. More participants are formulating financial plans, demanding more options from retirement plans sponsored by employers and are more diversified in their asset allocation than commonly thought.
The Equitable Nest Egg Survey interviewed 1,200 people; 600 baby boomers, 300 pre-retirees and 300 retirees with more than $50,000 in total household income.
More baby boomers, 62%, said they have a financial plan this year; in 1994, 52% said they had financial plans. The plans were developed around age 33. The median for both pre-retiree and retiree groups show they began to plan for retirement later, at age 42 and 41 respectively. A majority in all age categories believed their financial plans were either effective or very effective; more than 90% said their plans helped them achieve saving goals and enjoy good investment returns.
Perhaps because the survey sample included mostly more well-to-do households than the Public Agenda/EBRI survey, more respondents said they participate or have participated in an employee retirement plan. Sixty-two percent of baby boomers, 58% of pre-retirees and 64% of retirees said they were covered in pension plans. Twenty-nine percent of retirees said they were commonly covered by defined benefit plans vs. 13% of baby boomers; 33% of baby boomers invested in their company defined contribution plan.
Overall, people in the three age categories are satisfied with their defined contribution plans, but boomers are significantly less happy about specific plan issues than their older counterparts. Less than 40% of boomers said they were satisfied with on-site presentations, the expertise of plan representatives, individual consultation and investment returns.
Less than 20% of respondents in all age categories rated their own investment skills below average. Most thought of themselves as having average investment skill: 52% of boomers, 48% pre-retirees and 54% of retirees. About a quarter of each group considered their skills above average and about 5% rated themselves as excellent investors. About 50% of boomers and pre-retirees described their risk tolerance as "medium," while 34% of retirees said their risk tolerance was medium. Risk tolerance levels are creeping up. In 1994, just 45% of baby boomers said their risk tolerance was medium and 12% said they would take no investment risk, compared with 6% in 1995.
Participants want help
In the Equitable survey, 60% to 70% of respondents in the three age categories said their primary source of retirement planning was magazines and books. Between 48% and 56% in the categories relied on family and friends. Forty-nine percent of baby boomers used an independent financial planner, compared with 45% of pre-retirees and 39% of retirees.
Findings from the 401(k) Participant Investment Behavior survey published by Access Research Inc., Windsor, Conn., support the notion that participants want professional investment assistance.
The survey of 1,317 401(k) plan participants with household incomes exceeding $20,000 found 20% of respondents said they would be willing to pay for outside investment help. Most participants in the Access survey were not impressed with the information about available investment options provided by their employer or the plan's service providers. Across age and income categories, participants expressed strong interest in retirement counseling, investment education and annual investment reviews.
As far as applying what they are learning, participants in the Access study were almost twice as likely to change the allocation of current and future plan contributions as they were to transfer existing funds from investments already selected. About half of all those surveyed made some major change to their plan in the last year, such as increasing or decreasing their deferral rate, changing the allocation of new contributions or moving existing assets among options.
Does it vary by region?
While more than three-quarters of employers in the Midwest offer a 401(k) plan to employees, only 40% have determined what income replacement levels an employee actually will need at retirement. Perhaps as a consequence, 49% of employees don't save in a 401(k) plan because they say they have too many household expenses, according to a survey of 300 human resources and financial executives from Midwestern companies by CIGNA Retirement & Investment Services, Hartford, Conn. Another 20% think retirement is too far ahead to worry about.
Predictably, lower-paid employees making less than $66,000 per year save significantly less than higher-paid colleagues. Just 29% of the lower-paid workers save 6% or more of salary in a 401(k) plan, 26% save 5% and 25% save 4%. By contrast, of employees earning more than $66,000, 74% save more than 6% of pay in the defined contribution plan and 12% save 5%. Low-risk guaranteed investment contracts are clearly the most popular investment option in participant-driven plans, garnering 42% of investments, followed by an equity income fund option for 11% of the survey universe and 9% in a balanced fund.