Bridging The 401(k) Savings Gap
I recently had time to sit down with Dave Gray, head of Schwab Retirement Plan Services’ client experience team, to talk about a new Schwab Retirement Plan Services survey that surfaced a significant gap in what people in 401(k) plans believe they need for retirement, and what they actually are on track to save. Dave shares tips that may help you save more for your post-work years.
Why is there so much talk about retirement savings these days?
If you’re like most people, myself included, chances are you are at least somewhat concerned about saving enough for retirement. We’re living longer than ever before, which means our retirement savings need to last longer than ever before, too. That’s a big reason why around 50 million of us are saving money in our 401(k) accounts.1
Tell me about the survey Schwab fielded.
The survey covered more than 1,000 people nationwide saving in their 401(k). Interestingly, we found that most respondents calculated how much they’ll need to save for retirement, and more than 80 percent felt confident they’ll have enough. But they also told us that so far they only had about 1/8 of what they think they will need.2 That’s a big gap and, confident or not, many of these savers may not reach their goal. I recommend that anyone saving for retirement – no matter where they are on their path to retirement saving – take a few minutes to see how they are doing with our retirement calculator.
So what can readers do to improve their retirement savings potential?
If they’re reading this post, they are already thinking about retirement, which puts them a step ahead of many people. Here are a few ideas that may help readers save even more:
- Most plans offer a matching contribution. If yours does, make sure you are contributing at least enough to get the full match. Not doing so means you are leaving money on the table.
- Most 401(k) plans also offer some type of investment advice. Take advantage of it. We’ve learned that people who take advantage of 401(k) investment advice at Schwab save more, are better diversified and stay the course during market ups and downs.3
- If you are making your own investment decisions instead of using professional advice, make sure your investments are properly allocated. This is the investing equivalent of not putting all your eggs in one basket. You can use our investor profile questionnaire to help you determine what type of investor you are.
- Cost matters. Once you know how you want to allocate your account among different types of investments (stocks, bonds, domestic, international), check the choices in your plan. You may have access to more than one fund in some categories, like domestic stock funds. Consider funds with lower operating expenses, if they are available. These are often index funds designed to track a particular market segment like the S&P 500. Index funds usually cost less than actively-managed funds, where a portfolio manager handpicks the stocks. Cost isn’t the only thing to consider, of course, but it can significantly impact your 401(k) account. Using index funds instead of actively managed funds could add $115,000 in retirement savings for the average worker.4
- As you get closer to retirement, think about catch-up contributions. The government allows people over 50 years old to save an additional $5,500 each year in their 401(k) account, on top of the $17,000 base contribution limit.
What steps have you taken to boost your savings? Are you on track to retire comfortably? Feel free to send us a comment or ask a question to continue the conversation.
1 Employee Benefit Research Institute. 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2009, Issue Brief No. 350 (Washington D.C.: November 2010). Also cited in 401(k) Plans: Issues Involving Securities Lending in Plan Investments, GAO, 2010.
2 “401(k) Participant Survey” was initiated by Schwab in collaboration with Koski Research Inc., 2011.
3 Schwab Retirement Plan Services, Inc. in conjunction with Koski Research, "The New Rules of Engagement for 401(k) Plans," 2010.
4 Hypothetical assumptions for illustrative purposes only supporting an additional ~$115,000 to a 401(k) participant’s retirement savings: Annual market growth, 7.50%; initial contribution rate (year 1), 5.00%; increase in contribution rate (each year for years 2-6), 1.00%; ongoing contribution rate (each year for years 6-30), 10.00%; employer match, $.50 per $1 for the first 6% of income contributed; beginning salary, $50,000; yearly salary increase, 3.0%; starting age, 25; age at first year of distributions, 55; percent of last salary distributed annually, 50.0%. Approximate difference of $115,000 represents the additional account balance resulting from an investment allocation comprised of index mutual funds with a total weighted average operating expense ratio (OER) of 20 basis points versus an investment allocation comprised of actively managed mutual funds with a higher total weighted average OER of 86 basis points. The 86 basis point assumption is based on Cerulli analysis of mid-sized 401(k) plans. Assumptions do not factor in the potential impact of professional, independent advice services, nor any fees that may be associated with these services or other fees that may be charged to a participant account. Results not guaranteed.
Koski Research is not affiliated with The Charles Schwab Corporation or any of its subsidiaries.
This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, Financial Planner or Investment Manager.
The Charles Schwab Corporation provides services to retirement and other benefit plans and participants through its separate but affiliated companies and subsidiaries: Schwab Retirement Plan Services, Inc; and Schwab Retirement Plan Services Company. Schwab Retirement Plan Services, Inc. and Schwab Retirement Plan Services Company (collectively, “Schwab”) provide recordkeeping and related services with respect to retirement plans.
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