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FAs: Key Differentiators in Affecting Retirement Savings Behaviors

The Empower Institute’s 7th annual study of how financially prepared Americans are for retirement finds continuing improvement in many factors affecting lifetime income replacement percentages, but the findings show wide gaps in specific savings behaviors, leading to uneven results.

Based on survey results from more than 4,000 American workers aged 18 to 65, the white paper, “Scoring the Progress of Retirement Savers,” finds that the median projected income replacement among participants in the study was 64%, with Millennials at the high end at 75% and early Boomers at the low end at 55%.

Even with these positive outcomes, the authors emphasize that they see a “continuing and urgent opportunity” to influence retirement security in the DC space. They identify specific employee actions that correlate with significantly higher projected lifetime income and how employers “can foster these behaviors” through various plan features, tools and access to professional advice.

Access and Participation

Access to a workplace savings plan continues to be an ongoing issue, according to the study. The survey finds that 67% of respondents say that at least one earner has a plan available, leaving about a third of the population without access to an employer-provided plan. In fact, access has changed very little in the past seven years, the authors note. Participants who are eligible for a DC plan and actively contributing have a median income replacement percentage of nearly 80%, compared to only 45% for those without access.

An additional major factor in reaching a strong level of income replacement at retirement is how much a participant is contributing. The authors note that the fact that contribution rates make a difference is obvious, but the “degree of impact may be surprising.” Those who contribute under 3% of pay have a median lifetime income replacement percentage of under 60%, while those who contribute 10% or more have a median retirement income replacement of over 100%, according to the report.

Advisor Influence

The impact on people who work with an advisor compared to those who don’t was substantial, according to the findings. Those who have a paid advisor have a 33-percentage-point advantage in projected income replacement versus the do-it-yourselfers — with a median retirement progress score of 91% compared, to only 58% for those without an advisor.

The data also shows that one of the most important functions of a financial advisor is the creation of a formal financial plan. Those who do have a formal plan have a median projected income replacement of 99%, while those without a plan are on track to achieve a median replacement rate of 58%.

What do people want in their advisor? According to the findings, the most important factor was “maintaining confidentiality and privacy.” In a related question, respondents also said that a breach in this area would be the most likely reason to fire an advisor.

Tax Sensitivity

Meanwhile, despite long-standing assumptions that presume that those in higher tax brackets are more tax sensitive, the survey revealed that those at the lower end of the income spectrum are “even more likely than their higher-income counterparts to change their savings decisions if tax benefits change.”

In fact, the findings show that respondents earning less than $50,000 annually predicted a greater percentage drop in contributions (28%) compared to those earning $50,000 or more, should tax benefits change.

Plan Sponsor Steps

As to steps plan sponsors can take to help facilitate savings within a plan, the first is automatic enrollment, according to the authors. The study finds an 11-percentage-point difference in median income replacement percentages between participants who were enrolled automatically and those who opted into the plan.

Moreover, auto-escalation correlates with higher median income replacement. People who participate in a plan with this feature achieve a median retirement income replacement of 107% — 27 percentage points higher than participants in plans without it.

Employees’ savings behaviors are also significantly influenced by an employer match, including the degree to which employees are aware of what the match level is. In fact, of those who know their match in the plan, 73% (56% of total survey participants) set their contributions accordingly, the findings show.

Finally, education and personalization are also cited as difference-makers. “Employees who are confident in their understanding of various factors like health care costs and overall income requirements have a higher median lifetime income percentage than those who do not,” the report explains.