As for plan sponsors, this new research may show that plan participants may need more financial literacy and education after retirement than previously thought. Those literacy efforts may include the basics, such as understanding the importance of emergency accounts.
Many employers who are plan sponsors are often concerned both about the retirement readiness of their employees as well as how well those plan participants who’ve reached retirement are actually doing. In the past, survey responses have often shown that retirees report high satisfaction with their retirement lives. When today’s grandparents were kids, they were so alright, The Who sang songs about them. But now that they are grandparents, are those kids still alright? There may be cause to wonder.
New research by the Center for Retirement Research (CRR) shows that in the past survey responses of retirees showed high satisfaction even though objective measures told a different story. They note that the health and income measures of retirees should show low life satisfaction yet based on financial security, yet retirees did not respond as expected.[1] Those retirees often do not have sufficient means to respond to emergencies or rapid inflation. “Objective measures of retirement well-being, however, suggest that a large portion of retirees do not have the resources to maintain their pre-retirement standard of living. Indeed, to maintain their lifestyle, many retirees rely on credit cards and forego any financial buffer for emergencies.”[2]
The lack of resources for emergencies and reliance on credit cards is more than a mere theory. “Nearly one-third (30%) of older adults who carry over a credit card balance from month-to-month report carrying a balance of $10K or more, while 12% described their balance as $20K or more, up from 8% roughly a year ago.”[3] This could be a growing problem for retirees.
Current approaches to helping employees save more for retirement had seemed to be helping. The SECURE Act offered incentives to companies to start auto-enrollment of employees onto retirement plans. These incentives were supported by research indicating higher rates of participation among employees who were part of auto-enrollment. Recent research shows that more than a third of all private-sector workers enrolled in a 401(k) plan are in one with automatic enrollment. But now new research shows a smudge on those glimmery reports.
In a new and more nuanced assessment, researchers have found that these autoenrollment plans aren’t working quite as well as everyone had hoped. And, what’s worse, it’s likely this trend may continue. According to the CRR, when workers are initially auto-enrolled in retirement plans they “saved substantially more than the workers who lacked auto-enrollment plans. But the saving rate diminished as the researchers incorporated workers’ real-world decisions about how much or whether to save and whether they would stick with the automatic contributions increases embedded in the plan design.”[4] They found the rate of savings for those auto-enrolled versus those participating by opt-in was only 2.2% higher and falling. “[T]his gap shrinks over time to 0.6 percent when the rosy assumptions – that employees stick with their initial saving rate for all five years of the analysis, never withdraw money from their accounts, and fully vest – are dropped, and the data used in the analysis reflect workers’ real-world behavior.”[5] Nor did automatic increases help. “One factor was that less than half of them accepted the first scheduled increase, a number the researchers called ‘surprisingly high.’”[6] Researchers plan to find ways to incorporate objective measures of well-being into their research for a more comprehensive and nuanced approach. This may improve accuracy and be more helpful to policy makers assessing retirement needs.
As for plan sponsors, this new research may show that plan participants may need more financial literacy and education after retirement than previously thought. Those literacy efforts may include the basics, such as understanding the importance of emergency accounts. It might also be more nuanced, such as creating a household budget with earmarks for items that can easily be reduced if needed to cover inflation shocks or emergencies.
[1] https://crr.bc.edu/a-review-of-existing-measures-of-retirement-well-being
[2] https://crr.bc.edu/a-review-of-existing-measures-of-retirement-well-being
[3] https://press.aarp.org/2024-4-24-New-AARP-Survey-1-in-5-Americans-Ages-50-Have-No-Retirement-Savings
[4] https://crr.bc.edu/savings-boost-from-auto-enrollment-wanes-over-time
[5] https://crr.bc.edu/savings-boost-from-auto-enrollment-wanes-over-time
[6] https://crr.bc.edu/savings-boost-from-auto-enrollment-wanes-over-time
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
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