In the “2013 Universe Benchmarks Report,” the firm says it found that, not only do women save less but they are also more likely than their male counterparts to default on loans taken out of their retirement savings. These savings and investing habits, coupled with longer life expectancies, could impede women from meeting their financial needs in retirement, the report says.
The Aon Hewitt analysis of participant accounts showed that, while women participate in their employers’ defined contribution (DC) plans at the same rates as men, they save less—an average of 6.9% of pay, compared with 7.6% for men. In addition, nearly one-third (31%) of women were found to contribute below the company match threshold, compared with one-quarter of men.
As a result, women have average plan balances that are significantly lower than men, consistently across all salary ranges. Overall, the average plan balance for women is $59,300, compared with $100,000 for men.
According to Aon Hewitt, women contributing over their full careers should have 11.2 times their final pay to meet their retirement needs. However, they are actually on track to accumulate only 8.6 times final pay, which leaves a shortfall of 2.6 times pay. By contrast, men were found to have a projected shortfall of only 1.9 times pay.
“Women face a number of challenges when it comes to saving for retirement, including gaps in their career when they are not actively contributing to their retirement and longer life expectancies,” said Patti Balthazor Björk, director of retirement research at Aon Hewitt. “However, there are factors that women can control to boost their retirement savings, such as how much they contribute, how they invest over time and whether they keep assets within the retirement system.”
Taking funds out of retirement savings prematurely, also known as leakage, contributes to women’s retirement savings shortfall. Aon Hewitt’s analysis shows that, while women and men take loans from their retirement savings at similar rates, women are more likely to default on a loan at job termination than men. Nearly three-quarters of women (71%) who terminated employment with an outstanding loan defaulted on the loan, compared with 64% of men.
“There is little impact to long-term savings if loans are repaid in full and if individuals continue to contribute to their retirement savings while they repay the loan,” explained Björk. “However, the real threat to financial security comes when participants default on loans, most often at job termination. Unpaid loans are subject to taxes and penalties that create a permanent loss from workers’ retirement savings.”
Tips for Closing the Gap
For women to build up their retirement savings, Aon Hewitt suggests they:
Invest more and begin investing earlier. Aon Hewitt’s research shows that, in order to accumulate adequate retirement savings, individuals without pensions need to have at least 15% of compensation set aside every year if they start saving at age 25. Starting at age 35 increases this amount to nearly 25% of pay every year. Increasing retirement contributions by as little as 1% each year for five years, and maintaining that higher savings rate until retirement, can allow the average employee to retire at age 65 with adequate savings.
Take advantage of employer matching contributions. Increasing 401(k) contributions to the match level will boost women’s long-term savings outlook. For example, the average woman, receiving a company match level at $1.00 per $1.00 up to 6%, who contributes 3% of pay to her 401(k) will have $772,500 at retirement age. However, had she saved the full 6% of pay—the typical company match level—she could have $1,545,000 at retirement age: double the retirement savings.
Make the most of automatic features. Features such as automatic contribution escalation can help women gradually increase the amount being saved for retirement, with minimal effort. However, in many retirement plans, workers must actively choose this option. Aon Hewitt’s research shows that only 15.4% of women enroll in automatic contribution escalation.
Avoid leakage. While there may be times when women need to turn to withdrawals or loans from retirement savings to cover expenses, they should tap these funds only as a last resort and only for true hardships. And, when taking a loan is necessary, women are advised to limit the number of loans they take at any one time to reduce the risk of defaulting.
Take advantage of “help” tools. Aon Hewitt found that workers who use help tools, such as target-date funds (TDFs), managed accounts and online advice, fare better than those who go it alone. Those employees taking advantage of help experienced annual returns nearly 3% higher—292 basis points, net of fees—than those individuals managing their 401(k)s on their own.
The Aon Hewitt report analyzed more than 140 defined contribution plans representing 3.5 million eligible employees.
Report highlights can be found here.