Employer Plan Participation Rates Indicate Retirement Crisis

A report from the AARP Public Policy Institute suggests inadequate legs on the three-legged stool for retirement savings will mean a bleak retirement for many.

The report notes that Social Security income replacement rates drop off considerably as employees’ incomes increase, and Americans have not accumulated substantial sums in individual retirement accounts (IRAs) or other savings vehicles. That means those who have not been participating in an employer-sponsored retirement plan for much of their career will find it difficult to afford retirement.

However, around 50% of the workforce participated in an employer-sponsored plan since the late 1980s, the research says. Using a broader definition of coverage to include ownership of an IRA, the rate rises to just above 60%, according to the report.

Of concern is the variation of coverage rates by worker age or salary level. The report says coverage rates rise with employee age, but even among workers in the most critical age bracket (50 to 59), only about 60% have coverage under an employer-sponsored plan.

Fewer than 20% of workers earning less than $20,000 annually have accounts in an employer-sponsored plan, according to the report. Coverage increases to 60% for those with salaries in the $30,000 to $44,999 range, but jumps to more than 80% for those in the $75,000 to $99,999 salary range.

Likewise, there is a very high correlation between a worker’s education level and participation in an employer-sponsored plan. More than 75% of those who have not graduated from high school had coverage; however, coverage rises to about 55% for high school graduates and to nearly 80% for college graduates.

AARP says the decline in coverage by traditional final salary pension plans and the shift to dependence on 401(k) plans which workers voluntarily participate in have contributed to the troubling coverage figures.

DB to DC Shift

In addition, the AARP Public Policy Institute says the shift from DB to DC has shifted the risks of achieving a secure retirement from employers to employees. Undersaving and bad investment decisions can be a real problem for DC plans.

AARP points out that automatic enrollment and automatic deferral increase features can achieve an increase in coverage rates, but it also supports an auto IRA proposal.

In addition, AARP says employers should put forth a more concerted action to provide financial education to participants, and industry efforts to make the annuity market more efficient can help workers achieve a comfortable retirement.

The AARP report is available here.