Apr 12, 2011

Retirement system at an inflection point

What some investors may not realize about the retirement savings challenge is that we have already solved a major part of it — how to build up a solid nest egg.

Since the Pension Protection Act of 2006, key plan design features, such as automatic enrollment, automatic contribution, and automatic escalation, have vastly increased participation and improved the probability that workers will save what they need to retire.

Automatic contribution rates, with automatic escalation, have helped workers not only stay on track with contributions, but also save even more. In 2011, the Employee Benefits Research Institute (EBRI) found that, provided their plan makes full use of automatic features, younger workers are likely to be more successful in reaching a retirement savings goal of replacing 80% of their income.

In other words, we know what works well in a retirement plan, and now broader implementation is needed. But this is where the system is lagging, leaving many workers still worried about their ability to save enough for retirement.

  • The use of auto enrollment with 401(k) plans increased to 57% in 2010, from 24% in 2006, reports Aon Hewitt. That is good news, but it means that 43% of plans are not utilizing this valuable feature.
  • Some companies still hesitate to adopt auto escalation.
  • And 75 million American workers still do not have access to any workplace savings plan.

As with the discovery of a vaccine, once a solution is found, the next step is to deliver coverage to a whole population. While it is impressive to witness how much progress has been made in the development of retirement savings plans, industry and policymakers need to push for broader implementation.

And beyond these plan innovations is the next challenge: On New Year’s Day 2011, the most senior members of America’s 75-million strong baby boom generation began to turn 65. For these boomers and all retirees, it is time to focus on innovative retirement income withdrawal strategies.

Read more about public and private innovation to meet America’s lifetime income challenge.