The looming retirement crisis is a term that sounds ominous – and it is. Millions of Americans dream of a retirement that includes their hobbies and loved ones. Unfortunately, the harsh reality is that many of those dreamers will never actually get to retire because of a seriously inadequate nest egg that is supposed to sustain them through their twilight years.
America needs to wake up and realize we have a serious problem on our hands. It’s not an abstract one, but rather an issue that has specific origins. We have no chance of reversing the problem without figuring out how we got to this point and what we need to do to prevent the looming retirement crisis.
Here are the main obstacles we face:
1. Coverage
Study after study has shown the easiest and most effective way for people to save for retirement is through an employer-sponsored retirement plan, whether it’s a 401(k), IRA or another vehicle.
Over 40 million employees – especially those working at small businesses, don’t have access to a work-sponsored retirement savings plan.
Our solution? Mandated retirement savings plans. State governments are getting involved in this solution, but more needs to be done so that all workers have the opportunity to save at work.
2. Participation rates
Even among employees with the opportunity to save at work, there is an alarmingly low participation rate of only 52 percent, according to the Bureau of Labor Statistics. The retirement industry and government need to find a way to get people to utilize their plans and save money for their future. When employees have to opt for a plan, many wrongfully assume they need the money more now than they will later.
Our solution? Auto-enrollment. Research indicates that when people are auto-enrolled in a retirement plan, they stick with it after seeing how easy it is to use and its benefits.
3. Saving enough
In an earlier post, we discussed the new reality of retirement savings sources: Pensions are basically extinct, and Social Security is unstable. That means you alone are responsible for saving enough to last you through retirement.
The problem is that most people’s nest eggs are underfunded. According to the Employee Benefit Research Institute, 57 percent of workers report that the total value of their family’s savings and investments is less than $25,000 (this figure does not include the equity in their home or a defined benefit plan). Of that group, 28 percent of people have less than $1,000 saved.
Our solution? Auto-increasing savings amounts. For workers enrolled in a defined contribution plan, it is difficult to remember to keep increasing their deferral rate; plus, many people second-guess the decision as they believe they need the money more now than they will later. By auto-escalating deferral rates, we can help people save more without putting the burden on them to elect to save more.
4. Investing appropriately
Investment selection and portfolio allocation both seem to trip up savers very frequently – and with good reason. After all, most people don’t have expertise in the markets, and yet their future ultimately depends on these very complicated concepts and products.
It’s no surprise we are concerned that people are not investing appropriately for their age, risk tolerance or current market conditions. How can you know what is considered appropriate for you when you’re tasked with doing this on your own?
Our solution? Cost-effective professional advice. When there is a plumbing issue in your house, you call a professional plumber. It’s that same logic that should encourage the retirement industry and employers to offer professional resources to assist savers with their investment selection and ensure its suitability for their unique situation and goals.
Download Ubiquity’s Definitive Guide to Small Business 401(k)
