The Road to Retirement Security

I’m not easily convinced of anything, but when it comes to the defined contribution (DC) retirement system, I’m a believer. American workers now have some $4 trillion saved toward retirement in 401(k) and other DC plans. From 2002 to 2012, the number of active DC participants grew by 15 million, or 28 percent, bringing the total to nearly 68 million. The increase in DC participants over that period was nearly three times the decline in DB plan participants.[1]

Seven in ten workers are offered retirement savings plans by their employer and nearly eight in ten of those workers are contributing.[2] Tens of millions are effectively utilizing DC and their confidence in being able to achieve financial security in retirement is warranted. But there’s clearly more work to be done. EBRI’s 2014 Retirement Confidence Survey (RCS) provides an important reminder – on the road to retirement security, too many workers are travelling without a map and too many have failed to start their engines.

I don’t know where I’m going but I’m pretty sure I’ll get there

Despite the abundance of free online tools, the RCS found just 44 percent of workers had calculated how much they’ll need to save to live comfortably in retirement. Yet two-thirds of workers were confident they’re doing a good job preparing financially for retirement. This disconnect was further underscored by the fact that 52 percent of households have saved less than $10,000, including 36 percent of households that have saved nothing.

In reviewing RCS results, I identified a couple likely contributors to what I’d describe as pockets of false confidence:

  • 65 percent of workers expect to be able to work for pay in retirement, whereas just over one in four retirees (27 percent) have actually worked for pay since they retired.
  • Nearly half of workers estimated health care expenses in retirement to be less than $100,000, with three in ten estimating those costs below $50,000. Recent studies estimate unreimbursed health care expenses in excess of $200,000 for a typical retired couple through an average retirement.

The path to better outcomes

As complex as things sometimes get, I believe we can achieve substantially better retirements for workers overall by doing two things: informing the uninformed (and the misinformed) and enrolling the unenrolled. DC is a great system but we have yet to use it to its fullest potential. Here are a few things that each of the stakeholders in retirement readiness can do to help produce better outcomes.

  • Financial professionals and retirement plan service providers must continue to push better plan design, such as adjusting the matching formula to encourage employees to save at higher rates; and to provide the tools and guidance workers need to develop and execute a financial plan.
  • Plan sponsors must apply auto enrollment more broadly to get unenrolled workers into the plan, and they need to use higher default rates (6 percent vs. the typical 3 percent), with annual automatic increases, to help ensure employees are not only saving but saving adequately.
  • Workers need to take more ownership. They must get into the habit of saving early in their careers and they must be willing to make some modest adjustments to their spending habits.

Longer term, there’s a key role for policymakers as well. We’ve got to get financial literacy into our schools. Over recent years, much of the responsibility for decision making and funding financial security has shifted to the worker. Today just four states require a stand-alone personal finance course to graduate from high school.[3] Clearly, more has to be done to position workers for this new challenge.

Policymakers must also address Social Security, a system under pressure with a smaller number of workers supporting a larger number of retirees. American workers are paying into the system, as are employers on their behalf. When they retire, they should be able to count on Social Security to complement personal savings and investment.

The road that leads to retirement security is still too often the one less traveled, but it doesn’t have to be. By taking action, we can continue to increase the number of savers on a realistic path toward a comfortable retirement.



[1] Retirement Markets Overview, Retirement Research Inc., April 2013.

[2] The 2014 Retirement Confidence Survey, Employee Benefits Research Institute, March 2014.