Super-sizing Retirement Savings
Ray Kroc, who built McDonald’s restaurants into the world’s biggest fast-food chain, keenly understood the essence of how to succeed in business.
“The more I help others to succeed, the more I succeed,” Kroc said of his franchise business model that McDonald’s estimates has sold more than 250 billion hamburgers since its inception. The same approach can be applied by financial advisors in helping participants in 401(k) and other employer-sponsored retirement savings plans successfully prepare for retirement.
Overall, advisors seem to be doing a good job enticing savers as participation in 401(k) plans is high across the board for middle-income workers, according to the MassMutual Retirement Savings & Household Income Study1. Nearly nine in 10 middle-income workers – those with household incomes of $35,000 to $150,000 – save for retirement through work, the study finds.
While McDonald’s has flipped billions of burgers, the Investment Company Institute reports that 401(k) and other defined contribution plans have amassed assets of 7.3 trillion dollars2. Think how many McDonald’s hamburgers that money could buy with enough left over for fries and a shake too.
But not all participants in retirement plans are getting a full meal. That’s because the study shows that the lower their income, the less likely participants are to reap the full advantages from their employer’s retirement savings plan. Savers with higher incomes are far more likely to contribute a higher percentage of their income and take full advantage of matching contributions.
It’s an opportunity for advisors to become more successful by helping others succeed.
Encouraging participants to stretch their savings to take advantage of matching contributions is a good place to start. Overall, 84 percent of middle-income Americans whose employer matches contributions to a 401(k) save enough to receive the full match, according to the study. Yet, only 67 percent of those with household incomes below $$45,000 save enough to receive the full match compared with 90 percent of those with incomes of $75,000 or more. Men are more likely to receive the full match than women by 12 percent.
Lower-income workers are twice as likely as higher-income workers to skip saving altogether, according to the study. Of those who do not save, income is again a big determinant. Seven in 10 respondents with less than $45,000 in household income said they cannot afford to save for retirement compared to 23 percent of those earning $75,000 or more.
Higher-income savers are also more likely supersize their contributions. Nearly half (43 percent) of study respondents say they contribute at least 5 percent and as much as 9 percent of their income. And those with incomes of $45,000 or more were three times more likely to save at least 15 percent of their income compared to those earning less than $45,000.
So how might advisors proceed to make the retirement savings experience a happier, more accessible and fuller meal for all retirement plan participants? It requires a two-pronged approach, one on the employer level and the other on the employee level, to promote higher savings rates by employees at all income levels.
Support educational initiatives. Only one in four employers offers financial education or planning assistance, according to the study, with the most likely education being retirement planning. Meanwhile, three in 10 middle-income workers say they wish their employer would offer more retirement planning and one in five would like help with their retirement investments. Most financial services firms that provide 401(k)s products make resources available such as retirement education specialists to meet with groups of employees or even individual employees, online tools such as retirement calculators to gauge appropriate savings levels, webinars on retirement readiness and others.
Employ behavioral finance techniques. Employers can help encourage savings by automatically enrolling employees in their 401(k), requiring them to opt out if they wish not to contribute. Once employees start saving, they often find it’s more affordable than they thought. Automatic escalation increases the rate of savings, typically until it hits double digits or the employee decides to stop boosting his or her contributions.
Engage employees in marketing programs. Retirement plan providers often will create campaigns to promote retirement savings at the workplace, encouraging employees to start saving or boost their existing savings. Boosting those contributions may be the key to helping more workers become retirement ready.
Qualify for the Saver’s Credit. For the 2017 tax year, a married couple that files their taxes jointly and has an AGI of not more than $37,000 can obtain a credit of 50 percent of their retirement savings. The credit drops to 10 percent of retirement contributions for a married couple filing jointly with an AGI of $40,001--$62,000 and phases out completely for incomes above the latter threshold.2
Save pre-tax. Contributing pre-tax dollars to a 401(k) or similar plan may reduce a saver’s taxable income and, in the process, make saving more affordable. Saving pre-tax can also help those who are already maxing out their savings to find money to put in other vehicles such as IRAs or annuities.
Take advantage of any employer match. Not all employers match retirement plan contributions but many do. If an employer matches 3 percent of an employee’s salary for the first 6 percent contributed to a retirement plan, it’s an automatic 50 percent gain.
The retirement savings business, like McDonalds and other fast-food restaurants, is a game of reaching the masses, serving as many people as possible, as efficiently and effectively as possible. But it also takes education, incentives and outreach to convince workers not only to step up to the counter but to supersize their meal. Those that do may ultimately be able to trade their burger and fries at the local fast-food restaurant for steak and caviar at a fine dining establishment.
E. Thomas Foster Jr. is head of strategic relationships for retirement plans for Massachusetts Mutual Life Insurance Co. (MassMutual).
The information provided is not written or intended as specific tax or legal advice. MassMutual, its subsidiaries, employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.
1 MassMutual Retirement Savings and Household Income Study, https://www.massmutual.com/-/media/files/mm-retirement-savings-and-income-study
2 Investment Company Institute, Ten Important Facts About 401(k) Plans, August 2017, https://www.ici.org/pdf/ten_facts_401k.pdf