Inflation: Yes, it's the biggest problem facing America, say 401(k) plan participants

In a survey of 401(k) plan participants by TIAA, inflation was cited as the biggest problem facing the United States today – ahead of gun violence – and they said their spending and saving behaviors have changed as a result.

The survey, “Insights from 401(k) Contributors,” showed that 68% of plan participants pointed to inflation as a problem for the country, while 66% of participants called gun violence a problem. Other high-ranking concerns included:

• Violent crime (58%)
• Affordability of health care (56%)
• Federal budget deficit (50%)

Against that backdrop, 60% of respondents said that they are spending less in the current climate while just 6% said they are spending more. Meanwhile, 28% said that they are saving more versus only 9% who said they are saving less.

About 22% of participants in the survey said that they are not confident in their financial situation. Of those who said they are struggling, their chief concerns included debt, inflation and the cost of living, uncertainty about the future of the economy and insufficient income. Overall, participants said that their largest short-term priority is paying off debt, while long term they prioritize building their retirement savings.

“American workers have an awful lot of challenges ahead of retirement,” said Phil Maffei, managing director of Corporate Retirement Income Products for TIAA. “They have competing financial priorities and are often juggling saving for now versus saving for the future. And they are largely left to their own devices to figure out how to save and then draw down their savings without running out of money in their life, with tools that are inadequate. Let’s remember that the 401(k) plan was meant to be a supplemental savings plan to accompany lifetime income from a pension. Exacerbating this, wealth and retirement inequities experienced by women and people of color are largely due to entrenched, systematic structural issues that have been built over decades.”

Unsurprisingly, Maffei said, there are discouraging signs. Those include that 40% of U.S. households are expected to run out of money in retirement, average household shortfalls are projected at $100,000 and the shortfall is 20 times worse for the lowest-income earners. In addition, he noted, Social Security might be only able to pay 78% of scheduled benefits by 2034 without changes.

“It’s a lot to ask that plan sponsors solve all of this, but there are steps that they can take to help their employees retire with more security,” Maffei said.

He recommends an emphasis on lifetime income in retirement planning.

“When it comes to retirement planning, income is the new outcome, so one of the most important steps a plan sponsor can take is to add lifetime income in their retirement plan default,” Maffei said. “Doing this can give their employees the opportunity to contribute to a fixed annuity throughout their working career. At retirement, they have the option, but not obligation to convert that savings into steady income in retirement that can never be outlived.”

Maffei believes that fixed annuities “solve many of the concerns that workers say keep them up at night. They offer capital protection, guaranteed returns and guaranteed income in any market environment, making them not only appropriate for retirement income but investment portfolio resilience as well.”

Maffei said an allocation to a fixed annuity can help tackle several of the larger risks in a retirement portfolio.

Related: Throw cash in a 401(k)? 1 in 4 Americans have cut back on retirement savings

“They will not decrease in value, which reduces market risk,” he said. “They can reduce a portfolio’s overall credit risk, since fixed annuity providers tend to have superior credit ratings — participants can sleep well at night knowing issuers can and will make good on their promises. Finally, fixed annuities reduce longevity risk by providing retirement paychecks for life.”

Maffei said employers can support their most vulnerable workers with financial wellness and education programs that are designed to help them through difficult challenges while also keeping them enrolled and saving for retirement. Still, financial education programs are only one critical piece in the retirement puzzle, he said. “Educating our way toward secure retirements will not be enough,” Maffei said.

“The real success comes from product design and retirement plan architecture,” Maffei said. “If we build guaranteed retirement income options into our plans and products — making lifetime annuities a default option in 401(k)s, for instance — people could have happier, more-secure retirements.”