Do you plan on working forever, or retire on your own terms? Perhaps with this economy, too many people may feel the first answer is a possibility. Nevertheless, American households have over $18 trillion in assets marked for retirement according to the Investment Company Institute. Private sector retirement savings plans (e.g. 401k, profit sharing, deferred compensation, IRAs, etc.) represent about half of that treasure chest. Following are some insights on the importance, trends and opportunities for private sector plans to better put things in your favor.
Private Retirement Plans Play a Greater Role
• They help Americans think and act for their personal financial security. Having the right investment options and making the right choices are important. Tax benefits enhance retirement savings. And businesses find them important in attracting and retaining employees.
• Social Security – It needs plenty of mending. Some can retire comfortably on SS benefits alone. Others require more. And the need for personal savings grows for higher earners/ lifestyles – and potentially for younger Americans. SS benefits are based on a formula (earnings, quarters covered, etc.). However, the higher your “earnings,” the lower the projected SS benefits as a percentage of those “earnings.” If you final monthly pay is $3k, your SS benefit will be about $950 or 48% of pay; if your pay is $8k, the SS benefit is about $2,200 or 27% of pay (note: many simplifying assumptions).
Trends (Source: ICI, and Profit Sharing/401k Council of America – Note: PSCA surveys reflect larger employer plans – e.g. average 12,000 participants per plan, 820 surveyed)
• Pensions from defined benefit and defined contribution plans make up a growing share of retiree income. In 1975, benefits from those two represented 19% of total retiree income on a per capita basis. By 2009, it had grown to 26%.
• Participation remains relatively high – 77% of eligible participants contributed in 2010
• Contributions – Company contributions to profit sharing plans averaged 6.8%, 2.3% to 401k’s, and 4.6% to combination plans. Employee 401k contribution rates averaged about 6.8%.
• Other – Self directed plans offered an average of 18 fund choices. 45% offered Roth 401k after-tax contributions. And 42% offer automatic enrollment feature.
Opportunities to Improve Private Retirement Plans
• Education – Participants ought to know how much to save, not guess, for their retirement. Relevant guidance or advice in plain English would also help them make better investment choices.
• The Economy – An improving economy may bolster coverage, participation, and contributions (both company and employees). And the malaise may have shifted the attitudes toward risk – some participants may now be too conservative. Need to distinguish lower risk tolerance, vs. being smarter about risk management and achieving longer term retirement goals.
In summary, the payoffs from improvements in private retirement plans are huge. Participants have the benefits of greater financial security and less reliance on government programs. Employers might improve employee loyalty by enhancing financial literacy and planning resources. And the continuation of favorable tax treatment and increased contribution limits will help build a wealthier and more secure future.