Mutual fund companies that envision defined contribution plan participants starting by deferring 6% of their salaries and boosting that rate to 10% by age 35 are being overly optimistic, according to a study from JPMorgan Asset Management, New York.
While workers start by saving 6%, they dont defer 8% until theyre 40 and dont hit 10% until age 55, based on data on the 1.3 million participants in 401(k) plans the company administers.
Industry models also assume participants get annual salary increases, but the study showed they actually receive raises in only two out of every three years. The report also pointed to other factors the industry models dont account for: 20% of 401(k) participants borrow from their plan, and 15% make withdrawals once they reach the age of 59½, when tax penalties for early withdrawals cease. And the ups and downs in the financial markets can exacerbate that: If youre pulling out 10% of your balance and (the markets) down 20%, that hurts, said Anne Lester, a senior portfolio manager and co-author of the report.
The best way to improve employees chances of accumulating sufficient retirement savings is to diversify by adding alternative investments, according to the study. With investments such as real estate, high-yield bonds and emerging market securities, you get less volatility for comparable or slightly higher levels of return, Ms. Lester said.