What Your Employer Thinks About Your Retirement

Not long ago, the employee benefits consulting company Aon presented its triennial retirement-adequacy study, "The Real Deal," in which it uses its data on employee 401(k) accounts to estimate to what degree employees at the sort of companies it consults for are on- or off-track for retirement savings.  Their shocking conclusion:  "only 1 out of 3 workers who participate in their employer's benefit plans over a full-career . . . are expected to be able to retire with reasonably adequate retirement income."  Or, put another way, the average employee will need to work to age 70 in order to retire with enough money to meet their needs in retirement.

How do they calculate this?  Their approach is simple:  they assume that an employee's 401(k) account plus any pension rights comprises their entire retirement savings -- that is, they don't try to assume anything about any additional amounts in a fund from a prior employer or in an IRA -- and they assume that employees will continue contributing at whatever rate their data says they are contributing now plus any increases they're due for in an auto-escalation plan.  They also assume that workers will seek to maintain the standard of living they're now accustomed to, with reductions in spending only for changes in tax rates, the elimination of the need to save for retirement, and small changes in daily expenses, plus medical costs projected at actual average medical expenses.  They project their calculations with a standardized investment return assumption, and based on standardized assumptions regarding pay increases and inflation, and assume for simplification that everyone dies "on schedule" at their life expectancy (for which they build in future improvements in longevity), and that Social Security benefit formulas will remain unchanged, then they measures to what extent employees' projected savings will match up with their projected net-of-Social Security needs at retirement.

The result of all this math is this:  on average, they calculate that an average employee will have 7.9 times pay saved by the time they reach age-67 retirement.  But they'll need 16.4 times pay, and Social Security provides the equivalent of 5.3 times pay, meaning that they'll need 11.1 times pay, and there's an average shortfall of 3.2 times pay.  Analyzed by gender, women have an average shortfall of 4.0 and men 2.5 times pay, because of women's higher longevity and lower savings rates and account balances to-date.

Are these estimates overblown?  There's no doubt that in the same manner as political activists want to pitch their proposals for government intervention to improve retirement readiness, Aon is pitching their services to companies to help their employees be more ready for retirement.

But there are several noteworthy takeaways, the first of which is this: don't look for your employer to boost their 401(k) contribution .

The report itself presents survey data that shows that employer contributions to retirement accounts have actually been declining, not increasing, in the last decade and a half. In 2004, employers provided a "retirement benefit value" of 7.3% of pay.  In 2017, that dropped down to 6.3%.  And that's taking into account only employers who provide retirement benefits in the first place!  The report doesn't explain the causes of this drop, though it's likely a combination of both actual decreases in 401(k) contributions as well as declining numbers of employees receiving pension plan accruals.

What's more, the entire report is framed as "employees aren't saving enough."  And the advice that Aon gives client-employers who want to help employees be ready for retirement?  It's not about how to best boost those contributions -- this doesn't particularly seem to be on the table. It's about how to strategically get employees to contribute more of their own money, by providing additional information on retirement savings to their employees, or providing financial wellness programs, and by reducing expenses on the investment funds.  My past pension consulting experience also tells me that consulting firms like Aon are focused on helping their clients get their employees to save more with the right type of autoenrollment and auto-escalation program, or the right plan design for matched contributions, which is all well and good but doesn't increase the amount of money employers are kicking into their employees' accounts.

Perhaps this might change if the labor market tightens, in any industries in which employers are competing for workers.  But perhaps not -- if those employers figure that their employees and prospective employees will be comparing pay rates above all else.

In their report, they break down net-of-Social Security pay replacement needs by income and age, and the figures don't make all too much sense at first glance.  If you're a typical earner, and you're nearly at retirement (age 60+), they predict that you'll need 6.4 times your pay to fund your retirement spending in addition to Social Security.  If you're young, less than age 30, the figure is dramatically higher:  11.8 times pay for average earners, and higher at either end -- 13.1 times pay for high earners, and 13.5 times pay for low earners.

What's the reason for this difference? 

Young workers, by the time they reach retirement age, are expected to live much longer than current near-retirees.

Higher earners will need more money because Social Security's benefits replace less of their pay.

Lower earners will need more money because their medical costs will take up a higher share of their income.

And all earners will feel the sting of medical inflation significantly outpacing general inflation.

The 2018 version of the report doesn't include many details on methodology, but the 2015 report does (and the 2018 edition specifies the limited changes made).  In calculating the savings needed, Aon assumes that general inflation will be 2.5% per year, pay increases over one's career will amount to 4% per year on average, but that medical inflation will be 5.5% each year.  While the report doesn't break down the impact of these different factors, it's plain to see that this makes a huge difference, even with Medicare covering the lion's share of medical costs.

Finally, here's a third possible take-away:

Aon used a retirement age of 67 to perform its calculations, aligning it with Social Security Full Retirement Age, and it did so without pairing it with dire warnings to employers. 

Does this mean that employers are becoming more accepting of employees working past traditional retirement age?  Or was this done with a bit of a wink and a nod, with all parties meant to understand that workers aren't reallygoing to inconvenience their employers by working that long, and they'll all be shown the door one way or another before then, but that an age 67 retirement is just a handy way to present the data?  One hopes that the former is true, though it's still very much an unknown.

And a fourth data item which I hesitate to call a take-away because it just confirms what we all pretty much knew already, though it's handy to have actual numbers:  the report includes a chart on benefit prevalence among their large-employer clients.  In 1996, 79% of such employers provided a Defined Benefit pension plan for their salaried new-hire employees; in 2017, only 19% still did.

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