Raise 401(k) contribution rates to ensure retirement success
Making the first step of actually participating in a company 401(k) retirement plan is a big enough deal for most American workers, but research suggests that just showing up may not be enough to guarantee any level of retirement readiness.
The Employee Benefit Research Institute instead suggests that setting a higher starting point for new 401(k) contributions – a default level of 6 percent of pay, rather than the lackluster but traditional figure of 3 percent – could actually make a difference when it comes to producing tangible retirement savings.
EBRI’s most recent research says that the 3-percent-contribution figure, set out back in 2006 in the Pension Protection Act, was probably a good idea during times of economic ease and advancement, but that it’s simply too low now to generate considerable income replacement.
EBRI used its Retirement Security Projection Model to map the end results of both standard and higher-level contribution rates for younger workers, those who could potentially contribute to a 401(k) plan for 31-40 years of employment, and discovered that more than a quarter would not generate enough savings to achieve an income replacement rate of 80 percent – especially at a meager 3 percent.
“The study shows that substantial increases in success rates were found for both low- and high-income employees if employers raised the default 401(k) contribution rate to 6 percent of pay,” says Jack VanDerhei, EBRI’s research director.
A key consideration, VanDerhei adds, is if employees who change jobs and re-enroll in a new 401(k) find themselves automatically dropped to an automatic 3 percent rate, or can continue to save at a higher rate – part of the automatic escalation found in many plans.