While government continues to eye potential cuts to tax-deferred retirement contributions, the average worker is not taking full advantage of the 401(k) savings maximums allowed by their employer-sponsored plan.
Recent research found that 79% of households eligible to participate in an employer-sponsored defined contribution (DC) plan like a 401(k) did not have any adult contributing the maximum allowed by their plan. In fact, only 7% of eligible households had at least one adult contributing at the maximum level allowed.
Nearly three-quarters of those not contributing to the maximum were under the age of 50. In fact, participants ages 18-34 were most likely not to be contributing the maximum allowed.
Knowledge is power
Working with a paid financial advisor had a positive influence on saving, however. A full 55% of households contributing the maximum had an advisor, compared with 27% for those not maxed out. Having a formal, written financial plan also made a difference. Only 17% of households had a formal written plan, but 46% of those households were maxing out their contribution.
The value of advice cannot be overstated. A deeper understanding of the importance of saving and the tax advantages available may make a difference for many savers.
Are savings incentives at risk?
There are many important national discussions underway today and America’s future retirement security is among them. It should be; there’s a lot at stake.
Recently the Senate Finance Committee held a hearing on “Retirement Savings 2.0: Updating savings policy for the modern economy.” For working Americans, and those still trying to recover from the Great Recession, the retirement savings challenge is a pressing issue.
As the federal government seeks to fix its budget challenges, retirement contributions have come under scrutiny as a potential source of tax revenue. Lawmakers should never think of undermining personal savings as a way of coping with federal budget deficits. Every penny that Americans save is one less penny they will ever need from government.
Already, savers are not taking full advantage of their workplace plans, and are probably leaving tax advantages behind. The research found the average household is estimated to replace only 61% of current income in retirement.
Policies that limit savings incentives may have the unintended consequence of discouraging employers from offering plans. Savers need encouragement to maximize the potential of their retirement assets. And policymakers need to remain vigilant about preserving the structure that is already working for many workers.
Our existing public-private system provides us with a strong base to build on. The infrastructure and policies that support the retirement system need to continually evolve and advance. But modernizing the system should mean optimizing the existing system, not trying to re-invent it. We face a challenge, not a “crisis,” and we know what works.
Download the Putnam Lifetime Income Study IV.