Ready for retirement? Plan sponsors must address stark ‘demographic influences’

In its annual Compendium Report, the Transamerica Center for Retirement Studies highlighted how demographic influences can impact the ability of workers to prepare for a financially secure retirement.

The “A Compendium of Demographic Influences on Retirement Security” report, which was created in collaboration with Transamerica Institute, found that fewer than one in four Americans strongly agree that they are currently building a large enough retirement nest egg. Critically, Transamerica found that only 59% of workers with a household income of less than $50,000 have access to a 401(k) or similar plan through their employer. In comparison, 74% of those with a household income of $50,000-$99,999 and 84% of those with a household income of $100,000-plus are offered a plan.

As a result, 52% of individuals with a household income of less than $50,000 expect to primarily rely on Social Security in retirement, compared with 34% of those with an HHI of $50,000 to $99,000, 20% with an HHI of $100,000 to $199,000, and only 9% with an HHI of $200,000-plus.

Catherine Collinson, CEO and president of Transamerica Institute and Transamerica Center for Retirement Studies, noted that there are several ways that plan sponsors can work to support their lower-income employees, including:

• exploring plan features and design alternatives with their advisors,
• extending eligibility to part-time workers,
• collaborating with their plan providers on educational campaigns, and
• raising awareness of the Saver’s Credit, a tax credit for low- to moderate-income retirement savers.

“Among employers that do not offer retirement benefits (yet!), our research finds the underlying reasons relate to company size – they tend to be very small businesses – and concerns about cost,” Collinson said. “These employers may not be aware that it’s now easier and more affordable than ever before to adopt a plan, join a pooled employer plan, set up a payroll deduction IRA, or connect with an available state-facilitated retirement program.”

Where workers live can have a marked influence on their retirement savings. Rural residents that are not yet retired have saved an estimated median of $7,000 in total household retirement accounts, while urban area residents have saved $50,000 and suburban residents have saved $67,000.

In addition, stark racial disparities exist in retirement savings, according to the report. Among people who are not yet retired, those identifying as Black have only saved an estimated median of $17,000 in total household retirement accounts, while Hispanics have saved $29,000, whites have saved $60,000, and Asian American/Pacific Islanders have saved $74,000.

“Our research finds profoundly dramatic differences in retirement savings by demographic segments – especially level of income, which is influenced by factors such as gender, race/ethnicity, and urbanicity (i.e., rural, urban, suburban residents),” Collinson said. “For lower-income workers, their low savings rates are often attributable to lack of access to workplace retirement benefits and lack of income available to save. A double whammy. By gaining a greater understanding of employee demographics and key performance indicators of their plan offering, plan sponsors can identify specific areas and tactics for optimizing plan performance for the benefit of all their employees including lower income employees.”

Related: SECURE 2.0 opens up 2 new savings options for low-income workers in 2024

The report found many people prefer not to think about saving for retirement until they are close to retirement. Collinson said that seriously undermines their retirement savings.

“Procrastination is the enemy,” Collinson said. “Saving as early as possible and consistently over time can maximize the time horizon for savings and investments to compound and grow. Putting it off until the future can make it that much more difficult to save adequately. I’m very worried that many workers don’t fully understand the mathematical potential of long-term compounding.”

Collinson said many workers still do not prioritize financial planning and the role it can play in their long-term financial health.

“Over the years of my team’s conducting research, we find that many workers are not engaging in financial planning nor do they fully understand asset allocation principles,” Collinson said. “What workers don’t realize is that this type of knowledge can improve and guide their decision-making and, ultimately, lead to better outcomes.”

Those companies offering the support for workers that they need for a successful retirement are providing an invaluable service, Collinson said.

“Plan sponsors and their organizations are making a tremendous difference in the lives of their past, present, and future employees,” Collinson said. “By providing retirement benefits, they are giving their employees the opportunity to save for the future and build wealth.”