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Employee Overconfidence About Retirement Plans

While the stock markets continue their rebound from the recessionary years, new research finds American workers are feeling more confident about their retirement prospects. But should they be?

Wednesday, April 29, 2015
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According to a recent survey, American workers and retirees are feeling more confident this year about having enough money for a comfortable retirement.

But are they being realistic or simply hopeful?

The 2015 Retirement Confidence Survey conducted earlier this year by the Employee Benefit Research Institute and Greenwald & Associates, surveyed 1,000 American employees who were 25 years of age or older in various occupations and 1,000 retirees.

Overall, its findings showed people are more optimistic about retirement, with 22 percent reporting feeling "very confident" (up from 13 percent in 2013 and 18 percent last year).

However, that confidence is largely borne by workers with a pension, defined-contribution plan or individual retirement account: Forty-four percent of workers without such savings plans say they are "not confident at all" about having enough money to live comfortably in retirement, while only 14 percent of those who have a plan expressed those same concerns.

"It may be a temporary sense of security," says Craig Copeland, senior research associate and co-author of the survey report at EBRI in Washington. "They think they're doing well, but when you really look at what they have, it's not that much."

He says almost half of those surveyed over the past five years-48 percent-have calculated how much money they will need during retirement. Still, the amount of their savings-not counting the equity in their home-is low and really low for those without a retirement plan. He points to 80 percent of those without a retirement plan who have $10,000 or less in savings.

Based on RCS findings, 69 percent state they could save $25 a week more for retirement and 56 percent of workers expect to manage their finances during retirement with no more than 70 percent of their pre-retirement income.

 Other key results include:

  • 22 percent of workers are now very confident they'll have enough savings for retirement (up from 13 percent in 2013 and 18 percent in 2014); 36 percent are somewhat confident; and 24 percent are not all confident.

 

  • 51 percent of workers (down from 58 percent in 2014) and 31 percent of retirees (down from 44 percent in 2014) indicate a problem with their level of debt, such as car loans or credit card balances.

 

  • 37 percent of retirees (up from 18 percent in 2013 and 27 percent in 2014)  state they were very confidant about their financial security while 14 percent (statistically changed over the last two years) were not at all confident.

Despite HR's ongoing efforts to educate employees about retirement, Copeland believes more work can still be done.  For example, he says the RCS also asked questions about auto-enrollment retirement plans. Typically, he says, automatic employee contribution is 3 percent. But what if it jumped to 6 percent? How many additional employees would opt out?  According to survey results, Copeland says a small amount-roughly 6 percent.

One area that could stand some improvement is educating employees about other financial protections that can affect retirement, such as long-term disability insurance, adds Russ Dempsey, senior vice president of operations and chief legal officer at United Retirement Plan Consultants in Dublin, Ohio.

"Workers are expecting to stay in the workforce longer," he says, adding that it was "enlightening" to learn that 26 percent of workers participating in the survey plan to wait until age 70 to retire and aren't considering situations like illness or disability that can force them out of the workforce at an earlier age. He says HR should encourage them to run calculations at different retirement ages such as 65, 68 and 72 to see how long their retirement savings will last.

Because half of the workers responding to the survey cited cost of living and daily expenses as reasons for not saving for retirement, Dempsey adds that HR can send monthly emails to employees-or post employee suggestions on the HR portal-about simple retirement saving tips, such as avoiding buying snacks from vending machines.

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"If [HR] really pushed and prodded, people would admit they could save $25 more per week," he says, adding that with an employer match at 50 percent, employees could save $1,800 a year or $36,000 over 20 years. "Show the math on how small amounts can lead to meaningful amounts for retirement savings."

As daily living expenses continue to rise, so should retirement account balances, he says. Perhaps one reason why they're not growing at the same rate is because 67 percent of workers responding to the survey plan to work for pay during their "retirement" years.

Any way you look at it, experts agree, Americans aren't saving nearly enough.

More evidence comes from the National Retirement Risk Index, which measures the percentage of working-age households at risk of not maintaining their pre-retirement standard of living in retirement.

If there is any good news to be found in the report, it is that the index revealed an ever-so-slight improvement between 2010 and 2013, dropping from 53 percent to 52 percent of working-age households. However, the Survey of Consumer Finances reports that the median 401(k)/IRA balances in 2013 were modest, at only $110,000, according to NRRI Update Shows Half Still Falling Short, a report published in December by the Center for Retirement Research at Boston College in Chestnut Hill, Mass.

Although the stock market was up and housing prices have rebounded, it still wasn't enough to return the Index to pre-crisis levels, states the report.

"Despite the recoveries in the housing and stock markets, the National Retirement Risk Index shows that more than half of working age households are at risk of being unable to maintain their standard of living in retirement," adds Anthony Webb, senior research economist at the Center for Retirement Research, who co-authored the report.

"The NRRI clearly indicates that many Americans need to save more and work longer."

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