What Our Plan Sponsors Ask…

By April 19, 2016News

Q: Women are better retirement savers, but still lag behind men in outcomes. What gives?

 A: Indeed, there is a noteworthy imbalance in retirement wealth accumulation among men and women. Men consistently come out ahead, despite women’s superior savings behaviors.

Women are more likely to save, but men have higher account balances, according to a Vanguard white paper. Their data shows that women are 14% more likely than men to participate in their employer-sponsored retirement plan. Further, once enrolled, women save at higher rates — typically 7%-16% higher than men.

Don’t “autopilot” provisions like auto enrollment equalize things? On the participation front, yes; for savings, no. Among auto enroll plan participants, men and woman participate at similar rates, but men defer at 5% higher rates. Moreover, women are conscientious savers, and auto enrollment provides them an advantage. Sixty percent fall into lower wage brackets than men, but lower-income individuals experience more positive impacts on savings due to auto enrollment.

What’s more, higher incomes cancel out default features. Among male Vanguard participants, average wages were 25% higher, accounting for higher contribution rates by men in auto enroll plans. In voluntary enroll plans, women save at 6% higher rates. Vanguard’s paper highlights a lingering income disparity between men and women, and shows that American employers have more work to do to close the gender gap in retirement outcomes.

Read more at http://tinyurl.com/WomenAreBetterSavers.


Q: Younger employees are participating in our retirement plan, and that’s good. But their contribution rates are lower than we’d like, and we’re concerned they may not be savvy enough to make informed investment decisions. How do we help them save more and invest with confidence?

A: Your observations are spot-on. Although they’re just starting their careers, and paying down credit card and student debt is a top financial priority, 67% of workers in their 20s are already saving for retirement, according to a recent report from Transamerica Center for Retirement Studies.

However, savings rates for 20-somethings are quite low. The median contribution rate is 7% of annual pay, and many experts agree it should be around 10% for this age group.

Their investing knowledge is rudimentary, too. Thirty-seven percent say asset allocation—a basic, yet vital retirement investing principle—is a mystery. According to Transamerica, 27% “aren’t sure” how their contributions are invested, and 24% are in low-risk, low-return investments that may be too conservative for their time horizon.

So what’s a plan sponsor to do? Implementing step-up contributions is one way to help raise savings levels over time and attain that recommended 10% deferral rate faster than participants might on their own.

Offering a qualified default investment alternative (QDIA) also makes it easier for employees to make smarter investing choices. Target date funds1 are an excellent way to pursue long-term investing success. And a strong education and communication program, including face-to-face meetings with a financial advisor, informative materials that explain basic investing concepts and detail the plan’s investment options, and calculators to assist them in determining their retirement savings needs, can help all employees invest wisely and maximize the benefits of years of good savings habits.

1 The principal value of a target date fund is not guaranteed at any time, including at the target date.

Learn more about 20-somethings’ retirement attitudes at: http://tinyurl.com/Transamericatwentysomethings.


Q: Many younger participants are simultaneously saving for retirement and paying off student loans. How do we help them successfully accomplish both?

 A: Putting off retirement savings to pay down student loans is among the biggest financial mistakes younger workers can make. In fact, LIMRA found that a 22-year-old with $30,000 in student loan debt could have $325,000 less in savings at retirement than their debt-free counterparts.

So what’s a plan sponsor to do? Emphasize holistic financial well-being by:

  • Encouraging DC plan participants to make the minimum monthly payments on their student loans, and also reminding them to save enough in their retirement plan to get matching contributions. According to Financial Engines, one in four employees doesn’t take advantage of the match, meaning they’re leaving up to $43,000 on the table over 20 years.
  • Emphasizing creating an emergency fund for unforeseen expenses so they won’t be tempted to borrow from their retirement account or use credit cards.
  • Advising them to direct any remaining funds strategically, either by paying down high interest student loans, or investing more into their retirement portfolios and putting the money to work through compounding.
  • Encouraging participants to stash that extra cash in their retirement accounts once their debt is paid off. Many experts say workers should be saving 15% of their income by age 25 to ensure a comfortable retirement.

Find out more about helping workers save for retirement while paying off student loans at:

http://tinyurl.com/LIMRAStudentLoanResearch and http://tinyurl.com/StudentDebtVsRetirement.


Q: Is it true that workers with higher incomes benefit more from participating in tax-deferred savings plans due to higher marginal tax rates, and that our current tax system creates an “upside down” incentive to save because of tax deferrals?

A: A recent ICI paper summarizing Peter Brady’s book, “Who Benefits from the Retirement System,” examined this issue and found that these beliefs about tax deferral are myths. ICI’s simulations discovered that the design of the Social Security System, not income tax, is responsible for the increase in tax deferral benefits with lifetime earnings. Higher earners tend to benefit more from tax deferral because they contribute more to retirement plans over their careers. Thus, Social Security benefits replace less of their pre-retirement income, so higher earners need to save more to achieve their target income replacement rates.

Further, ICI found the current tax code does not create an “upside down” incentive to save. By taxing investment returns, normal income tax treatment discourages saving. So tax deferral boosts savings and “equalizes” the incentive, effectively taxing all workers’ investment returns at a zero rate.

See ICI’s additional findings at http://tinyurl.com/ICIBenefitsOfTaxDeferrals.