More evidence today that 401k participants are staying the course so far in 2022 despite inflation and market volatility comes from a new T. Rowe Price report.
During the first half of 2022, over 95% of 401k participants in plans recordkept by T. Rowe Price have not made any investment exchanges. The midyear research update to its 2022 U.S. Retirement Market Outlook also found that less than 1% of workers fully invested in target date funds made any investment changes.
About one in five participants have increased their deferral rate, and deferral rates overall have remained steady at 8.4%. But that’s still well below what the Baltimore-based global investment management firm recommends for participants.
“We continue to suggest that workers save at least 15%, including any employer contribution, of their annual salary for retirement,” said T. Rowe Price Thought Leadership Director Judith Ward, who co-authored the new research paper along with Vice President of Retirement Thought Leadership Sudipto Banerjee.
“More recently, however, the average contribution has trended slightly downward, suggesting workers may be reducing contributions to cope with inflation.”
T. Rowe Price’s Judith Ward
“This is a rule of thumb. In practice, the suggested savings rate will vary from person to person, usually increasing for people with higher incomes,” Ward continued. “For those close to retirement but unable to meet their retirement savings benchmarks, they might consider delaying retirement for a year or two, taking part-time work in retirement, or making spending adjustments.”
Banerjee noted that for most of the first half of 2022, average 401k contribution rates stayed relatively stable. “More recently, however, the average contribution has trended slightly downward, suggesting workers may be reducing contributions to cope with inflation. If high inflation persists and the downward trend in 401k contribution rates is prolonged, it could become problematic because retirement savings might fall.”
In response to these findings, Ward and Banerjee suggest that employers can help workers stay on the right path with saving for retirement through higher plan-level adoption of target date products, communicating risks to workers of trying to time the market, providing access to emergency savings vehicles, and providing access to retirement income tools, products and services.
Ward and Banerjee also offered the following guidance to individual investors on how they can adapt to current market turmoil:
- Retirees review their spending expectations: Based on the firm’s research, a conservative approach, based on a 4% initial withdrawal rate, could be part of a sustainable spending plan, even when retirement starts in times of significant market selloffs.
- Build up cash reserves: Workers are advised to have an emergency fund that could cover three to six months of expenses. When heading into retirement, Ward and Banerjee suggest a cash buffer that could cover one to two years of spending.
- Maintain an appropriate asset allocation for long-term success: An appropriate allocation between stocks and bonds can provide current income and stability while also offering the growth potential necessary for a long retirement. Diversifying within each asset category is also important.
- Leverage educational programs and build a plan: T. Rowe Price suggests savers take advantage of financial wellness education and programs offered by their employer, or work with their financial professional to assess options and craft a plan that works best for their personal situation and stage of their retirement journey.
See the summary and supporting data for recommendations for individuals.
SEE ALSO:
• 401k Participants Largely Stand Pat in First Half of 2022
• Down Market Doesn’t Stop DC Retirement Savers: ICI Report
• Defaults Matter: T. Rowe Price Analysis Shows Just How Much
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.
