Many Unsure 401(k) Will Produce Adequate Income

More than half of employees are unsure their 401(k) retirement plan will provide them with adequate funds for retirement, says a new survey.

A survey from Pentegra Retirement Services finds that among U.S. adults who are employed and enrolled in a 401(k) plan, 65% do not believe or are unsure that their plan will provide enough money for them to retire when they want to or plan to. Nonetheless, 75% of 401(k) participants still think that 401(k) plans are the most important source of a person’s retirement income, according to the survey.

Survey findings also reveal that 45% of 401(k) participants are contributing only 6% or less of yearly earnings to their retirement account. However, 42% of 401(k) participants say they understand that you do not have to pay taxes on contributions made to the plan.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

“We cannot emphasize enough the importance of putting this money away and taking advantage of a 401(k) plan, not only for retirement but also to save money on taxes,” says Rich Rausser, senior vice president of client services at Pentegra Retirement Services in White Plains, New York. “Tax deferred contributions through a 401(k) plan lower your reported income, so the more you contribute the less taxable income you have. It is a win-win. By saving $20 per week on a $400 weekly salary, you are left with $380. After subtracting the 28% federal tax amount, your take-home pay is $274. Put that same $20 into a (taxable) savings account, and your take-home pay drops to $268. That six-dollar difference may not seem like much now, but multiply it over 52 weeks for 25 years and you are looking at pocketing an extra $7,800.”

The fact that nearly two-thirds of 401(k) participants do not believe or are not sure that their 401(k) plan will provide enough money in retirement is discouraging news, says Rausser. “The fact is that you need to try to save enough to provide income replacement of 80% to 90% of your annual pre-retirement income, for each year in retirement, in order for you to enjoy a lifestyle similar to the one you have now.”

In addition, the survey also reveals that three in 10 (31%) 401(k) participants admit they have no understanding of where or how their plan contributions are being invested. Thirty-seven percent of 401(k) participants say that as long their plan balance is there for them when they want it, they are not concerned with how it is invested.

Rausser encourages people to have a greater understanding of the process. “People really need to have a basic knowledge of how their money is being invested and how the process works. This is your hard earned money and your future. Take the time to sit down, even just once a year, with someone in charge of your plan. Ask questions and get answers you understand.”

On an encouraging note, says Rausser, the survey finds that 63% of 401(k) participants have increased their contributions at some point. Only 19% of participants say they have never increased their contributions.

“Increasing your contribution every year is the key to retirement planning success,” adds Rausser. “Each time you get a raise, increase your contribution by at least 1% or 2% annually. A simple way to do this is to have an automatic escalation feature as part of the 401(k) plan, so that contributions are increased automatically on an annual basis. This puts saving on auto-pilot so that participants don’t have to think about it.”

Other highlights of the survey include:

  • On average, the last time 401(k) participants increased their contribution was 2.4 years ago.
  • For those with a total annual household income (HHI) of $50,000 to $74,900, the last time they increased their contributions was 2.6 years ago. Those with a HHI of $100,000 or more increased their contribution 2.5 years ago. By contrast, those with a HHI of less than $50,000 last increased their contributions only 1.2 years ago.
  • Those who contribute more than 10% of their salary to their 401(k) plan most recently increased their contribution on average 3.3 years ago, significantly longer than the average of 2.1 years ago for those who contribute 10% or less of their salary.
  • Over two-thirds (68%) of 401(k) participants do not expect to use their 401(k) until they are required to take the mandatory minimum distribution (at age 70½).
  • About one-third (32%) of 401(k) participants believe that starting a 401(k) later in life with larger contributions will yield the same results as if they had started at a younger age with smaller contributions.

The survey was conducted online within the United States by Harris Poll, on behalf of Pentegra Retirement Services, from February 10 to 12, among 2,059 U.S. adults ages 18 and older, among whom 446 are employed full-time or part-time and are currently enrolled in a 401(k) plan.

More information about the survey can be downloaded here.

Economy Strengthened by Construction, Energy and Other Areas

The ongoing recovery of the U.S. economy may be strengthened by six particular profit themes, says a new analysis.

A resurgent construction industry, the U.S. energy renaissance, the evolution of technology and a second iteration of health care reform are likely to create opportunities for investors in 2014, according to a recent analysis by the U.S. Small Cap Growth Team for The Boston Company Asset Management (TBC), which is BNY Mellon’s Boston-based equity specialist.

In addition to the four themes related to energy, construction, technology and health care, the TBC team also foresees investment themes related to manufacturing and the rotation of funds into U.S. equity markets.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

On the macro side of things, the analysis finds that tapering of the quantitative easing program, combined with a continuing accommodative monetary policy, could reduce pressure on the dollar, as well as help draw money into U.S. markets from emerging markets and to reduce commodity prices. The TBC team also expects that the prospect of rising interest rates could shift money from bonds to stocks.

Looking at specific sectors, the analysis finds the energy renaissance, driven by meaningful improvements in extracting hydrocarbons, as a major positive development. Todd Wakefield, senior portfolio manager of the TBC team, says, “We see the energy sector as a leader in job creation and capital spending. Furthermore, the country’s move toward energy self-sufficiency is resulting in structural changes to our trade deficit and foreign policy.”

The analysis finds that other factors worth considering for 2014 include a potential increase in spending on both commercial and residential construction, in addition to continuing developments in technology.

Regarding housing, the TBC team says the inventory overhang from the previous housing bubble has diminished, although household formation continues to be slowed by poor employment opportunities for the 25- to 34-year-old age group. Household formation is an important driver of housing, says the TBC team. The analysis predicts that improving employment in this age group will drive higher household formation, fueling housing demand.

In technology, the TBC team sees growing opportunities in security, “Big Data,” cloud-based computing systems and social media technology. The analysis foresees that Internet-connected technology will grow as more appliances, vending machines and other nontraditional computing devices are linked to the Internet so they can be better controlled and monitored remotely.

The analysis also foresees opportunities to develop in health care and manufacturing.

“Millions of people are joining the health care system, while reimbursement will be reduced for many providers as a result of new regulations,” says Wakefield. “In the sector, we are focused on innovative companies that have pricing power.”

In manufacturing, the analysis notes that 3D printing has the potential to dramatically change production processes, although it will be difficult to select the firms that will dominate the business.

The Boston Company Asset Management, LLC, provides investment management services for corporate, public, mutual funds and union sponsored and jointly trusteed retirement plans, endowments and foundations. BNY Mellon is a global investments company that provides financial services for institutions, corporations or individual investors.

«