The Employee Benefit Research Institute’s (EBRI’s) 2016 “Retirement Confidence Survey” provides helpful insights on employee behavior and benchmarking data for plan sponsors striving to help their employees attain retirement readiness. When it comes to retirement preparation, the study indicates that confidence often doesn’t correlate to the underlying facts. Closing the perception/reality gap remains a significant challenge for many plan sponsors.
Looking at the numbers
According to the EBRI, overall confidence levels (covering active retirement plan participants as well as those not currently covered by a plan or a spouse’s plan) have essentially remained flat during the past two years, following a rebound after the 2008 financial crisis. In the latest survey, 21% of workers report that they’re “very” confident about having enough money for a comfortable retirement, 42% are “somewhat” confident, 16% are “not too” and 19% are “not at all” confident.
A bit of good news for plan sponsors: Employee confidence about having enough money for a comfortable retirement correlates with whether they or their spouse participates in a plan. For example, 26% of plan participants report they’re “very confident,” vs. only 10% of nonparticipants.
Retirement confidence also correlates with personal debt burdens. According to the study, 32% who report that debt isn’t a problem are very confident about their retirement prospects, compared to 9% for whom debt is a major issue.
A relatively large (28%) proportion of employees award themselves high marks for their ongoing efforts to prepare for retirement. 43% report being “somewhat confident” about the job they’re doing, with the remainder nearly evenly split between those who aren’t too confident or not at all confident about the matter.
Perceptions vs. reality
Authors of the EBRI report found a disconnect between retirement confidence levels and actions. “The percentage of workers who reported they and/or their spouse had [ever] saved for retirement peaked in 2009 at 75%, but declined thereafter,” they wrote. Currently, the proportion of employees who reported they’re currently saving for retirement was 63%. Yet 2009 generally marked the beginning of an upswing in retirement confidence.
One perspective on the basis for employee retirement confidence (or lack thereof) is reported levels of retirement savings assets. (See the “Retirement savings distribution” chart.) That a majority of plan participants have less than $100,000 in retirement savings is broadly indicative of a significant shortfall. However, the picture isn’t entirely clear, since the data isn’t adjusted for employee age, income level or years of service.
Savings rate expectations
When asked to estimate the percentage of their income needed to meet retirement saving goals, 18% of respondents covered by a retirement plan indicated that they didn’t know. But responses from the remaining 82% varied widely, with the largest proportion (20%) estimating a required savings rate between 20% and 29% — a highly unrealistic target for most workers with average incomes.
On the opposite end of the spectrum, 9% of survey respondents estimated that a savings rate below 10% would be sufficient, and an equal percentage stated that they need to be saving at least 50% of their income annually. The survey data doesn’t specifically address the accuracy of those estimates. What it does show, however, is that employees generally aren’t saving at the rate they believe they should be. This may be a source of the expectation by 13% of survey respondents that they’ll need to postpone retirement beyond the age they had once expected to retire.
As for when they’ll retire, 26% of surveyed employees expect to retire at age 65. The number is the same as those expecting to retire at age 70 or beyond. And 6% don’t expect ever to retire.
Educating is key
On a positive note, employees recognize a need for receiving advice on retirement investing — with a strong preference for getting it in person. Only 2% were “very interested” in using online advice providers.
What does this mean for plan sponsors? In guiding employees toward retiring at their desired retirement age, technology-based systems alone are insufficient to get the job done. Invest in education that employees will use and learn from.
Closing the gap
Generally, employees with false confidence in their ability to retire when they want have no motivation to change their retirement saving pattern. Making sure your plan participants fully understand the reality of their retirement savings goals can result in a successful retirement plan.
BPM is one of the largest California-based accounting and consulting firms, ranking in the top 50 in the country. It has served the San Francisco Bay Area's emerging and mid-cap businesses, as well as high-net-worth individuals, since 1986. Our Employee Benefits team consists of professionals with extensive knowledge of ERISA guidelines and deep expertise performing employee benefit plan audits. We can help you craft a smooth-running plan that serves your employees while mitigating associated risk. For more information or for a free expert consultation, Jenise Gaskin at (925) 296-1016 or Mike Spence at (408) 961-6303 or visit us at www.bpmcpa.com/ebp.