When It Comes to Retirement Savings, Most Workers Are on Their Own

It’s nice that some companies are nudging employees toward putting aside more for 401(k)s, but those firms are solidly in the minority.

Mike Blake / Reuters

When a company sets a default contribution rate, most employees adhere to it—usually this has to do with the human tendency to stick with the status quo, but occasionally it’s because some employers match contributions made up to that default rate. So, the number a company chooses—even if it’s only 1 percentage point different from the norm—can have powerful effects on workers’ long-term wealth.

The most common default rate is 3 percent, and The Wall Street Journal reported last week that an increasing number of companies are going beyond that, effectively encouraging their employees to set aside more of their incomes. Ten years ago, 27 percent of companies set their default rate at 4 percent; now, it is 39 percent. (It should be noted that the Journal’s sample is sort of abnormal. The paper looked at employers that use Vanguard, a company known for charging some of the lowest fees in the asset-management industry. A company that uses Vanguard is probably more sensitive to employees’ retirement needs in general.) State, local, and city governments have almost always used systems like this to get employees to share the cost of their employers’ pension plans, and now it appears that private companies providing 401(k) plans are catching up.

401(k)s could certainly be improved—notably, the fact that they’re voluntary leads many to financial ruin late in life—but having one is generally good. The risk of being poor or near-poor in old age falls slightly when a worker has some kind of retirement account, so it’s good that some companies are increasing what their employees are nudged toward contributing.

What’s not as good is that only 41 percent of private-sector employees have any kind of pension plan at work, including traditional pensions and 401(k)-type plans. Essentially, employers are off the hook and private-sector workers are on their own. This is at the root of some stark facts about American workers’ preparations for retirement.

First of all, most older workers simply don’t have any retirement assets—no IRAs or 401(k)s. And for the fortunate workers who do have accounts, there’s not much in them. On average, older workers excluding those in the top 10 percent of the income distribution—whose average income is about $75,000 per year—have about $80,000 in their retirement accounts. Those in the top 10 percent have more than $400,000 in retirement assets, and both of those figures are well below the amount recommended by the rule of thumb that says, “Retire with 10 times your yearly salary.”

And that’s just for the lucky minority of workers with retirement accounts. Most young workers, despite the great benefits of investing money early in life, aren’t saving for retirement. Young workers can be forgiven for losing sight of such a distant savings goal, but it might be surprising that most people 10 to 15 years away from retirement don’t have pensions or 401(k)s.

Why do they have so little? Employers aren’t required to sponsor retirement plans, and even if they do, they aren’t required to contribute to it. So it’s nice that a few companies are setting norms that encourage workers to save—but they are an exception to the rule of leaving everything up to workers.