You might expect that participation rates in an employer’s 401k plan would be much higher for older workers, as many non-participating younger workers will eventually join in after dealing with student loan debt, saving to buy a house or starting a family.
But that lack of participation by young workers and many low-income workers can skew overall participation statistics, which can lead to misperceptions about retirement preparedness, which is among the key takeaways from a new study released Aug. 5 by the Investment Company Institute (ICI).
American workers’ participation in employer-sponsored retirement plans is significantly higher than suggested by the most commonly cited statistics, with nearly two-thirds of workers between ages 26 and 64 participating in such plans, either directly or through a spouse, according to ICI’s “Who Participates in Retirement Plans, 2016.”
The participation rate rises to more than three-quarters if younger and lower-income workers—those who are the least likely to be able to or want to save for retirement—are removed from the analysis.
“By the time they retire, the vast majority of American workers will accumulate resources in employer plans,” says ICI Senior Economic Adviser Peter Brady. “This is not well understood for two reasons. First, participation is often understated in household surveys, which are used to study participation. Second, many younger and lower-income workers who are not participating in retirement plans today will do so later in their careers.”
Why overall participation rate is misleading
ICI’s report shows that the overall participation rate—which is a snapshot of how many workers are taking advantage of an employer plan at a single point in time—can misrepresent retirement preparedness. The reason is simple: just because some workers aren’t participating in a plan today, doesn’t mean they won’t participate later in life.
The study explains that younger and lower-income workers are the least likely to want to save for retirement, and thus less likely to search for an employer who offers a retirement plan or participate in a plan if given the choice. This is for a variety of reasons:
- Younger workers are typically focused on saving for goals other than retirement, such as saving to buy a house, pay for education, or start a family. They may rationally choose to delay saving for retirement until they’re older, when earnings are typically higher and they have taken care of other priorities.
- Workers who remain low income throughout their careers may rationally choose not to save for retirement at any age, as it would reduce the resources available to address more immediate financial needs, and Social Security benefits alone will replace a high percentage of their earnings.
Participation increases with age
Consistent with expectations, the study shows participation in employer plans increases as workers get older. For example, 55% of workers between the ages of 26 to 34 either participated in an employer plan or had a spouse who participated. This rate increases to 69% for workers who were 45 to 64 years old.
Earnings play role in participation
ICI’s paper also demonstrates that higher-earning workers are more likely to participate in an employer plan. For example, among workers between 26 and 64 years old in 2016, the probability that an employee participated in a retirement plan at his/her workplace spanned the following range:
- 22% for those who earned less than $20,000
- 67% for those who earned $40,000 to $50,000
- 85% for those who earned $100,000 or more
A new look at the data
ICI says the need for a more reliable measure of retirement plan participation has increased in the wake of a change to the survey that provides the most commonly cited statistics on retirement plan participation, the Annual Social and Economic Supplement (ASEC) to the Current Population Survey (CPS).
The ICI study uses newly available tax data published by the Internal Revenue Service (IRS) Statistics of Income Division (SOI). Comparisons with tax data suggest that the ASEC understated the participation rate by about 5 percentage points from 2008 to 2013. Between 2013 and 2016, the difference increased to 18 percentage points following the revision to the survey questionnaire used for the ASEC.
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
