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Saving for Retirement: The Great American Struggle Continues

After spending much of his adult life studying the pension industry and the retirement savings habits of American workers, Dallas Salisbury, Chief Executive Officer of the Employee Benefits Research Institute (EBRI), has come to a rather depressing conclusion. Addressing the SVIA Forum, Salisbury warned that "the vast majority of Americans, if they don't start saving soon, will never be able to retire."

Part of the problem, Salisbury said, is the declining prevalence of traditional, defined-benefit pension plans. From 1977 to 1997, the percentage of non-government U.S. workers participating in defined benefit plans fell from about 38% to about 21%, according to U.S. Department of Labor data. While the number of workers covered by defined contribution plans rose during that period of time by a comparable amount—to approximately 25% from about 7%—that's less than reassuring when you consider that participation in the plans is voluntary, and, at many companies, inadequate. To illustrate, Salisbury said, EBRI data indicates that in 1999 less than 2.5% of workers earnings between $40,000 and $60,000 per year contributed to their 401(k) plans at the maximum levels allowed by law. Even among workers earnings more than $100,000 per year, only about 40% did so.

Drawing on data from the January 2000 Federal Reserve Bulletin, Salisbury also noted that the median value of 401(k) accounts for families that had no other pension plan available to them was only $12,000. In older families where workers have had more time to save—those where workers were between the ages of 55 and 64—the median family account balance was still just $22,000. While more recent EBRI studies have indicated that average account balance in 401(k) plans is higher today—$58,774 as of 2000—that's still quite small in comparison with the amount of money the average retiree will need from retirement to death.

In a wide-ranging presentation at the SVIA Forum, Salisbury cited a number of important and sometimes surprising findings about how American workers save for retirement, and also offered his views on recent major developments in the retirement savings arena. Among the highlights:

The presence of a defined benefit plan increases, rather than decreases, participation in defined contribution plans. As noted earlier, Federal Reserve data published in January 2000 indicated that the median account balance in 401(k) plans, where that was the only retirement plan available to workers, was $12,000. But among workers also covered by a defined benefit plan, the median 401(k) account balance was $25,000. "The absence of a defined benefit plan is absolutely predictive of lower retirement assets," Salisbury said.

While investment advice services are increasingly available to participants in defined contribution plans, only a small portion of workers use them. "Less than 10% of those who have access to investment advice take advantage of it on a regular basis," Salisbury said.

Higher contribution limits for defined contribution plans, which take effect next year under the Economic Growth and Tax Relief Reconciliation Act of 2001, aren't likely to benefit the majority of workers already contributing less than the maximum allowable amounts to their retirement plans. "For the vast majority of participants, these changes in limits are totally irrelevant," Salisbury said.

Workers appear to underestimate the risk of holding their employer's stock in their defined contribution plans. The evidence? When comparing asset allocation trends in 1999, EBRI found that in plans which include company stock as investment option, investors tend to use that stock as a substitute for stable value investments and bonds rather than as a substitute for equities, which is the more rational decision.

Employers can do a number of things to improve the rate at which their workers save for retirement, beyond offering a defined benefit plan to complement their defined contribution plan. High on his list: match employee contributions with employer contributions in defined contribution plans, and make participation in those plans automatic unless employees formally elect to opt out of them.

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