The good news is that American workers are “making progress” in closing the gap between the amount of money needed for retirement and what they’re on track to accumulate, due mainly to stronger market returns. The bad news is they now need to save 11 times their final pay in order to have an affordable quality of life in retirement.
These are the findings from a new Aon Hewitt report, titled “The Real Deal: 2012 Retirement Income Adequacy at Large Companies” which examined the projected retirement levels of 2.2 million employees at 78 large U.S. companies.
Surprisingly, the study finds that, on average, full-career contributing employees are on track to accumulate 8.8 times their final pay, leaving a shortfall of 2.2 times pay. This is a slight improvement over 2010 when the shortfall was 2.4 times pay. Employees who rely solely on a defined contribution plan to fund their retirement are making similar progress, reducing their shortfall from 4.3 times pay in 2010 to 3.8 times pay.
Yet despite the improvement, less than 30% of full-career employees are still currently "on track" to achieve adequate retirement income. Passive employee behavior also is at an all-time high, with just 15% of participants initiating a trade in 2011, down from 20% in 2008 and prior years.
"It is encouraging to see that the continued efforts by employers and employees to increase retirement income security may be paying off," Rob Reiskytl, leader of retirement plan strategy and design at Aon Hewitt, said in a statement. "To further improve results, employers should design their 401(k) plans in a way that harnesses inertia, such as matching at higher rates of savings and combining automatic enrollment with automatic contribution escalation for all employees. Ideal solutions will improve outcomes with little or no increase in employer cost."
The company’s analysis shows that taking advantage of economies of scale in reducing fees and expense ratios is critical to achieving adequate retirement income levels. A 1% difference in average returns over a career and retirement period can result in a two-times-pay difference in retirement resources, Aon notes.
"Employers cannot influence market returns, but they can leverage their scale to reduce investment fees, which can have an impact on employees' savings over time," Reiskytl added. "In addition, more employers are offering an array of investment advisory services like investment advice, managed accounts and pre-mixed portfolios. These tools can improve the diversification and efficiency of participants' portfolios and help workers invest more effectively with very little effort."