Is 3 percent really some magical retirement savings number?
When companies with 401(k) retirement savings plans enroll new hires automatically, many set a default contribution rate of 3 percent of salary. Why not 4, or 5.5, or 6? Are companies saying you can afford to retire if you save just 3 percent of your salary a year?
Hardly. Less than 22 percent of large companies surveyed by Towers Watson even provided 401(k) participants with a suggestion about how much to save. Of the companies that did, 39 percent recommended 10 percent or more. Increasingly, retirement experts say 15 percent is more like it.
While few plans dare set default rates that high, more are moving to 4, 5, or 6 percent. A few use 8 percent (check out the No. 2 company on Bloomberg’s interactive 401(k) ranking), and at least one company, Google, sets it at 10 percent.
If your plan enrolled you at 3 percent, there is a reason. It’s just not a very good reason. Three percent may be the norm simply because it was used in an example the government gave to employers early on, said Rob Austin, Aon Hewitt’s director of retirement research. The other reason it’s common, he said: Plans mimic their peers.