Participants in 401(k) retirement plans who work with financial advisors save more and have clearer financial goals than their peers, according to a study by Natixis Global Asset Management.
Overall, however, the study shows many workers – including those close to retirement – aren’t on track to meet the savings targets they’ve set for themselves. The results, based on a survey of 1,000 respondents, of which 899 were enrolled in 401(k) programs, also show participants who have advisors are more aggressive.
The survey found:
- Participation is substantial: 90 percent of respondents eligible to participate in 401(k)s are making contributions. Tax incentives, matching contributions by employers and automatic enrollment are factors in the high participation rate.
- Contributions rise with advice: On average, workers contribute 8.6 percent of their salaries to their 401(k)s. Advised investors put in 9.5 percent, compared with 7.8 percent by those without advisors.
- Advised investors have targets: 74 percent of advised participants say they know what their 401(k) balance should be by the time they retire; 54 percent of workers without advisors say the same.
"Our research shows that Americans save for retirement when they have access to 401(k) plans and those who use advisors are typically more engaged investors," said John Hailer, CEO of Natixis Global Asset Management in the Americas and Asia. "We need to look for opportunities to expand the availability of 401(k) plans and encourage current participants to better understand their retirement income needs. Investors, plan sponsors, financial advisors and the government all have roles to play in helping to solve retirement planning challenges."
Retirement savings shortfall
Participants are motivated to put money into their 401(k)s because of tax incentives; incentives offered by their employer, such as matching contributions; and the ease of using the plans to save for retirement in a disciplined way. Nearly one-third (29%) say their employer automatically steps up their contribution levels over time.
Even with the generally encouraging level of savings, many participants aren’t on course to meet their self-identified retirement savings targets. The potential shortfall is especially notable among Baby Boomers, those from ages 50 to 67. Many lacked access to retirement plans earlier in their careers – or, if they did have it, contributed less to their 401(k)s than they do now.
The survey found:
- Boomers lag: 33 percent of Boomers have put aside less than $50,000. In comparison, 41 percent of participants in the Millennial or Generation Y group (those from ages 18 to 33) already have put aside $50,000.
- Failure to keep pace: Baby Boomers have saved an average of $262,541, about a third of the $805,398 they predict they’ll need at retirement.
- Younger investors also struggle: Members of Generation X (ages 34 to 49) have saved $206,866 toward their goal of just over $1 million. Millennials average $91,215 in their plans; they say they’ll need $822,000 for retirement (a target which may be too low, given their ages).
"Investors of all ages should take a second look at how much they save and what their needs are likely to be when they retire," Hailer said. "While many workers get it right, others might ask if their investing targets will get the job done. Too many seem to be setting the bar too low because they may lack access to the proper tools, education and guidance."
Without advice, education and tools may not be enough
Workers say their employers provide a great deal of retirement information and tools. Among the most popular materials available to them are printed education documents, retirement calculators and interactive planning tools. However, relatively few investors make full use of the offerings. The most popular tool on many 401(k) websites – a retirement income calculator – has been used by only 38 percent of participants. Likewise, 51 percent say their employers offer personalized performance benchmarks, such as displaying a rate of progress toward a retirement savings goal. But only 23 percent acknowledge using them.
Part of the reason for the disconnect is that some investors don’t understand the information put before them:
- Many are confused: 43 percent say their employer’s materials are difficult to understand. Those working without advisors are more likely to have issues with their employer’s information (49%, compared with 37% of those who do use advisors).
- Uncertainty about investments: 33 percent don’t know where their money is being invested.
- A desire to learn: 48 percent say that, if they understood their plans better, they would consider increasing their contributions.
"While many participants say they would contribute more money to their 401(k)s if they were more knowledgeable, they aren’t taking advantage of the tools available to them, suggesting that education and tools without advice may not be enough," said Ed Farrington, executive vice president for retirement and business development for Natixis.
The results show that participants who use financial advisors are better prepared to set retirement savings targets and are more engaged in planning and investment decision-making. For example, the study found 71 percent have spoken to their advisor about the level of contributions adequate for meeting their retirement goals. "From our view, advisors can add enormous value to plan sponsors and participants by helping to fill the gap between setting and achieving retirement savings goals," added Farrington.