The emergence of defined contribution plans as the primary means of retirement in the private sector has been a boon for younger workers — the millennials. Employers have done a good job teaching them the importance of saving for retirement and providing them with the tools to invest those savings effectively. The outlook is not so sanguine for the preceding generations, especially those caught in the middle of the transition from defined benefit plans and hurt late in their careers by two bear markets, 2000-01 and 2008-09.
A study by the Empower Institute found millennials, those born between 1981 and 2000, are on track to replace 75% of their income in retirement, based on estimates of their rate of retirement saving accumulation and other financial factors. The projected replacement rate for Generation X, those born between 1965 and 1980, is a not-so-healthy 61%. Baby boomers are already at the retirement age. Not much can be done to help them now.
Some companies have increased wages and/or given bonuses in response to the corporate tax cut passed last year by Congress, but some extra effort should be made to help the Gen X workers prepare for the financial impact of leaving the workforce. Those workers often have found the defined benefit pensions they were promised when they joined their companies have been frozen, and they will not receive the benefit they anticipated. At the same time, they will not have enough years in the defined contribution plans that replaced the DB plans to make up for any losses in pension benefits.
Employers are being urged to take a holistic view of employee financial wellness, helping employees cope with student loan debt and create health savings accounts as well as retirement savings. One survey by Alight Solutions found 46% of workers would like help with debt management and help paying off student loans in particular, while 47% would like help saving for children’s education. But employers are reluctant to take on additional responsibilities for employee financial well-being beyond the traditional retirement planning.
A study by Alight showed only 23% of employers wanted to help with debt management, only 20% thought they should help employees save for children’s education, and only 18% thought they should help employees pay off student debt. Currently, only 5% provide money to help employees pay off student debt, and only 1% contribute to 529 college savings plans.
Already most employers sponsoring defined contribution plans provide significant education, guidance and tools to employees so they can invest wisely for retirement. Most employees, if given a choice, likely would prefer higher wages that would allow them to more easily meet their obligations for debt repayment over more company hand-holding and guidance on other issues. At the same time, they probably would not object to a more generous match of their contributions to the companies’ 401(k) plans, especially those employees nearing retirement.
According to Vanguard Group, the median promised employer contribution to match employee contributions was an estimated 4% of pay in 2017, up from 3.5% in 2014. That’s a significant improvement, but likely not enough for Gen X workers. It is probably too late to help the first of the Gen X workers who likely have put in their 35 years and are retired or about to. But millions more of that generation are entering their last decade of work and can still be helped to accumulate a decent retirement account.
The bonuses and wage increases handed out by many companies as a result of the corporate tax cut no doubt were welcomed by those who received them but would have had greater long-term benefit for the workers and the economy if at least part had been in the form of additional contributions to the retirement plans.
It is not too late to remedy the situation. The corporate tax cuts are permanent, at least until Congress repeals them, so the effect on corporate after-tax profits also should be more than a one-year event. Therefore, some of the increased profits in the coming years can be, and should be, passed down to the employees.
This time, at least part should be in the form of increased matches of employee contributions, subject to IRS non-discrimination rules, and should continue as long as the lower tax rates hold. Boosting the company match will not only help those employees close to retirement accumulate a larger pool of retirement savings, but it might encourage them, and the millennials, to step up their own contributions.
Companies should continue to boost their match of employee contributions to 401(k) and other defined contribution plans while the good times last to help employees prepare for retirement.