America's Savings Crisis Highlights the Importance of Workplace Retirement Plans

An already-concerning U.S. savings crisis has been exacerbated by the addition of a once-in-a-century pandemic, which has upended many people's finances. A lack of emergency funds, lack of long-term savings, layoffs and furloughs, and housing insecurity are just a few challenges that have left Americans struggling to make ends meet — let alone save toward retirement.

The Federal Reserve Bank's 2022 Economic Well Being of U.S. Households report revealed that 28 percent of non-retired adults did not have any retirement savings — an increase of 3% since 2021. On the other hand, almost three-quarters of non-retired adults said they had at least some retirement savings, with 54% of those indicating their money was in a defined contribution plan such as a 4019k) or 403(b)¹. 

There were also generational differences associated with savings, with 57% of those ages 18 to 29 saying they had some retirement savings and 24% of that group indicating they were on track. The older the individuals, the higher the percentage of those who had some retirement savings (45 to to 59 at 81% and 60+ at 88%)¹.

As more workers contend with their ability to save during and after their working years, you may want to consider the advantages of a retirement plan offering at your business.

Why Aren't More Americans Saving for Retirement?

Not saving for retirement often correlates with financial challenges elsewhere in an individual's life. Trouble covering current living expenses today makes it difficult to plan and save for a retirement that could still be decades away. The most recent Retirement Confidence Survey by the Employee Benefit Research Institute echoed these sentiments. The survey found that 64% of respondents were only somewhat confident that they will have enough money to take care of basic expenses during retirement.

Other obstacles that can impede retirement include:

• Longer life expectancy: Americans today are living longer than those in previous generations. The Social Security Administration estimates that a man who turned 65 in 2018 (born in 1953) can expect to live another 18.1 years, on average. For women turning 65 in 2018, the life expectancy is an additional 20.7 years. The longer you live, the more money you'll need, even if it's to cover just basic expenses.
• Insufficient Social Security benefits: While retirees currently collect Social Security benefits, there continues to be a looming sentiment that these funds will be cut or run out before individuals will be eligible to begin claiming them.
• Rising health insurance costs: Healthcare premiums have been on the rise for years, and individuals need to prepare for medical costs to increase as they get older. This is why part of sound retirement planning includes accounting for health-related costs. 
• Lack of access to retirement options: While an employer-sponsored 401(k) plan is a popular employee benefit, not all businesses offer one, especially smaller companies. According to the U.S. Bureau of Labor Statistics, 68% of private-industry nonunion workers had access to employer-provided retirement plans as of March 2023 but only 52% of the workers participated.
• Americans are working until later in life: The average American is putting off retirement and working longer than those in previous generations, either out of necessity or preference. However, factors such as health issues, professional skills gaps, and caretaking for family members can hinder individuals from continuing to work at the same level as they did when they were younger.

Why It's Important That Employees Save and Invest for Retirement

Consistent saving is integral for employees to give themselves the freedom and control over their non-working years. While external factors can add unpredictability into their lives, saving for retirement is something within employees' control. The factors below are important ones to communicate with employees who may either have no retirement funds or are behind on saving.

The Future of Social Security Is Unpredictable

According to the Social Security Administration, the Old-Age and Survivors Insurance (OASI) Trust Fund will be depleted by 2034 , and the continuing tax income will only be able to cover 77% of the scheduled benefits owed to individuals. Given these factors, the assumption that Social Security benefits will completely fulfill a retiree's financial needs is not sustainable.

Factors in Your Control

In addition to Social Security benefits, account for other related factors such as tax rates, inflation, and government programs such as Medicare, all of which are sure to evolve over time. That's why employees should prioritize retirement savings. Even with variances such as contribution limits, employer matching, and market returns throughout their working years, a consistent plan for saving into a 401(k) or similar plan is completely up to them to take advantage of.

Maintain Independence

Having adequate savings for retirement allows for a certain level of self-sufficiency. Those who don't have enough to afford even the most basic of living expenses — housing, food, etc. — may have no choice but to rely on their kids or family members. While some may enjoy such a setup, others don't envision their retirement years this way. For this reason alone, saving enough for retirement is key to having happy and independent non-working years.

Take Advantage of the Power of Compounding

One of the greatest advantages of retirement plans is the power of compound earnings growth, where you earn interest on the interest you've already earned. And the earlier you start saving (and continue to consistently save), the more of an impact compound interest can have on your total savings. As you can see in the chart below, even a few extra years of saving can make a sizable impact.

Additionally, account for the fact that incrementally increasing 401(k) contributions over time would allow for even more money at retirement.

Ways To Improve Retirement Saving for Your Employees

As an employer, you are in a great position to help your employees plan for retirement and make the most of the plan that you offer. Below are some ways you can encourage them to start saving.

Take Advantage of State-Sponsored Retirement Plans

In an effort to help combat a retirement crisis and meet worker demand for more robust retirement plan options, some state governments have implemented their own programs. For example, Oregon has required that every employed individual in the state have access to a retirement savings plan. To assist employers in meeting this obligation, the state has rolled out OregonSaves, a government-sponsored plan. California, Connecticut, Illinois, Massachusetts, and Maryland have also set up similar plans for certain workers who lack access to a retirement savings plan through their employer.

Offer a Retirement Plan as Part of Your Employee Benefits Package

When offered as part of a total benefits package, retirement plans are one way to help employees prepare for their future. Smaller employers can add a basic retirement plan option that can help improve hiring and employee retention. With 401(k) plans in particular, there are many routes you can go when setting up and servicing a plan. Integration with payroll makes servicing and compliance easier than ever. Provisions in the SECURE Act provided a tax credit of up to $5,000 a year over three years and an auto-enrollment credit of $500 a year over three years, for a total tax credit of up to $16,500, for new plans.

Under the SECURE Act 2.0, which became law in late December 2022, an additional credit became available; the employer contribution credit. This credit is generally a percentage of the amount contributed by the employer, up to $1,000 per employee. It is limited to employers with 50 or fewer employees and reduced  for employers with between 51 and 100 employees. 

Since some states now require certain employers to offer a plan, companies will also need to understand and comply with newly enacted laws regarding retirement benefits. In many cases, offering your own plan will meet the state's requirements. Providing access to state-sponsored plans like OregonSaves may be an option, but these state plans give employers less control over plan design and fees.

Making Changes to an Existing 401(k) Plan

Just offering a retirement plan option to employees may not be enough to encourage them to save. Younger staff may not be thinking about retirement and established workers may already feel that they're stretched too thin to save. Employers need to offer plans that will yield tangible benefits and take the time to communicate how a retirement plan can provide long-term financial security. If your current plan hasn't gained traction, it may be time to upgrade to another option. Adding a company match or new investment choices can increase interest in your plan. Or you may want to revamp your plan in its entirety and bring in a new provider. The benefits of switching 401(k) providers may include cost savings for both companies and employees, along with increased participation and better savings results for your staff.

Increasing 401(k) Contribution Limits

If your company does offer a retirement savings plan, communicating the benefits of maximizing contributions is essential. In 2024, employees can contribute up to $23,000 toward their 401(k) plans. Those 50 and older may contribute up to a total of $30,500, which includes an additional $7,500 catch-up contribution. By keeping updated on the latest retirement plan changes and providing updated information to plan participants, employers can help their staff spread their contributions more evenly throughout the year and achieve their annual savings goals.

Encourage Employees to Project Current Savings Into the Future

Taking some time now to assess long-term financial goals can help employees in the long run. They should be asking themselves questions such as:

• How much is currently in my 401(k) account?
• Taking the power of compounding into consideration, what will I have saved by the age I'd like to retire?
• What would happen if I increased retirement contributions by even 1 or 2% each year?
• What do my savings mean for my lifestyle? Will I be able to spend the same amount each month as I currently do?

Using a retirement calculator is a great way to help employees answer these questions and visualize retirement savings. Many employees are disconnected from the power of compound interest, focusing instead on more short-term or immediate financial priorities. But by providing a visual, the inspiration to take advantage of a retirement plan can be powerful. Provide tools and resources to help your employees understand how much they are currently saving and give them an idea of how that breaks down into monthly expenditures.

Fighting the Retirement Savings Crisis in America

Employers play a crucial role in helping U.S. workers save toward a dignified retirement, particularly as a savings crisis continues to loom throughout the U.S. Company-sponsored defined contribution plans like a 401(k) are not only an essential part of achieving this goal, but they are also a key benefit that many potential employees look for when considering whether to join a company. If you'd like to review your current offerings or add a new plan to your benefits package, consider retirement plan services available on the market today.

¹Report on the Economic Well-Being of U.S. Households in 2022, May 2023