As more employees ask for retirement planning vehicles in their employer-sponsored plans, a Principal study finds automatic features helps participants achieve their largest share of retirement income.
Latest research from Principal shows that over half (51%) of 725 respondents attributed auto-enrollment to kickstarting their retirement savings journey, and 81% said it helped them begin saving even sooner. As 82% of workers surveyed anticipate employer-sponsored plans to make up most of their retirement income, it goes without saying that auto-enrollment has essentially contributed to adequate savings for workers.
“Specific to auto-features, auto-escalation and solid plan design are also critical to savings success,” said Joleen Workman, vice president of customer care for retirement and income solutions at Principal Financial Group, in an interview with 401K Specialist. “For example, auto-enrollment at 6% with a 1% annual increase up to at least 10% can set participants up to be more successful in achieving their retirement goals. Without auto-escalation as part of plan design, participants can get stuck at the rate that they were enrolled in for years, which can lead to lower balances, putting people behind in their overall retirement planning efforts.”
The Principal research found respondents are also planning to use Social Security (78%) and personal savings like individual retirement accounts (25%) as other sources of income during retirement.
Workers debating phased retirement as confidence levels dip
While the findings show that more respondents are utilizing auto-enrollment to deliver retirement savings, less than half (49%) of workers today say they feel financially secure in their savings. This confidence drops even more with women (43%) and persons of color (POC) (39%).
As a result, the findings reflect a growing trend that we’re seeing in the retirement industry due to inflation and current market conditions: more people are working longer or even considering a phased retirement to maximize retirement savings and adequate income. Principal research found that nearly four in 10 workers plan to transition to a phased retirement or part-time work before age 65.
“We see phased retirement as a viable option for many workers who not only want to boost retirement income but continue their passions in retirement. While some may continue the job they held in pre-retirement years—on a part-time or full-time basis—some may pursue new hobbies that supplement income in retirement years,” said Workman.
Employee education is key
Continued education on producing retirement income can build confidence and establish enough retirement income, Workman said. The Principal study found the No. 3 financial regret reported by respondents was their lack of knowledge on different financial topics. In fact, 51% of respondents said they only have a basic or beginner level of financial understanding. The percentage increased even more with women (59%) and POC (65%).
“Americans face important financial decisions each and every day. Those decisions can feel even heavier in economic environments like the one we are experiencing today. That’s where ongoing financial education comes in—it provides us with the tools to make decisions that put us on the path to reach our financial goals during uncertainty,” Workman added.
“Financial education is not one-size-fits-all,” she continued. “Advisors should be sharing resources and guidance that are unique to each of their clients’ situations, whether it be based on income level, investments, and assets, and beyond.”
Despite the lack of knowledge, respondents indicated being open to working with financial institutions and experts. Seventy percent said they trust the financial institutions they work with, and 65% trust that their retirement plan service provider is helping them reach their retirement goals. Fifty percent believe their employer is doing all they can to help them save for retirement.
“This creates huge opportunities for financial advisors to not only create trust with participants but make education both easier to access and specific to each unique clients’ situation to help them build strong, long-term retirement savings habits for the future, concluded Workman. “More personalized advice is needed to help more savers feel confident in their retirement savings, now and for the future.”
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Amanda Umpierrez is the Managing Editor of 401(k) Specialist magazine. She is a financial services reporter with over six years of experience and a passion for telling stories and reporting news. Amanda received her degree in journalism and government and politics at St. John’s University. She is originally from Queens, New York, but now resides in Denver, Colorado with her partner. In her free time, Amanda enjoys running, cooking, and watching the latest drama show.
