Younger people may be better prepared for retirement because of regulations imposed in the wake of the Pension Protection Act of 2006 and innovations like auto-enrollment and auto-escalation.
Retirement readiness is within reach for participants in defined contribution plans, according to a new John Hancock white paper, although the odds of their being prepared increase as ages decrease.
The report, "State of the Participant 2020: readiness within reach," finds that the older participants are, the lower the percentage of those considered retirement ready—defined as having sufficient projected assets by the time they hit the normal Social Security age to replace at least 70 percent of their preretirement earnings.
In fact, just 20.4 percent of those age 60 and older can be considered retirement ready, with other age groups' preparation level as follows: ages 50–59, 34.2 percent; ages 40–49, 53.3 percent; ages 30–39, 65.9 percent (actually the best-prepared group of the lot); and under age 30, 60.4 percent.
The percentage improves so markedly for those under 50, according to the report, because of regulations imposed in the wake of the Pension Protection Act of 2006 and innovations like auto-enrollment and auto-escalation.
But employers can do more to help employees prepare, says the report, if they know where the shortcomings lie—and can act through changes in plan design, improvements in employee engagement and other techniques to make that happen. Among the strategies the report suggests, in addition to automatic features, are choosing the right qualified default investment alternative for auto enrollees; keeping abreast of fiduciary responsibilities to protect employees; and riding herd on administrative inefficiencies to keep employee costs down and contributions moving in a timely fashion.
Higher default contribution rates at auto-enrollment, it points out, don't really affect opt-out rates for auto enrollment by a significant margin, and incorporating an auto-escalation feature can help employees better prepare, while self-directed investors could benefit from nudges toward age-appropriate concentrations in equities. And target-date funds can take the thought out of the process for those who really aren't actively involved in managing their DC plan portfolio.
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Marlene Satter
Marlene Y. Satter has worked in and written about the financial industry for decades.
