Engagement Is Key to Boosting Retirement Security

On one level, Americans are investing for retirement like never before. In 2021, a record 60 million workers contributed to their employer-sponsored 401(k) plans while nearly 50 million held assets in tax-advantaged individual retirement accounts (IRAs). Even as stock and bond market volatility increased during the first half of 2022, remained relatively steady and withdrawal activity was low.

Increased use of auto-enrollment — where employees who do not make elections are enrolled in employer-sponsored plans by default — is likely related to these steady participation numbers. However, while encouraging, saving alone is not enough. Routine interaction with retirement accounts and engagement in making decisions about account management are also needed. Lack of engagement can contribute to some of the biggest mistakes workers unknowingly make with their retirement accounts. For example, surveys and studies show:

• One out of three 401(k) savers do not take full advantage of company matching contributions, leaving free money on the table.
• One-third of retirement savers routinely the mix of stocks and bonds in their portfolios to align with their age and risk tolerance.
• During the Great Resignation, 21% of workers who voluntarily quit their job and had a 401(k), cashed out their account potentially triggering taxes and early withdrawal penalties, negating the benefits of tax deferral that make 401(k)s so compelling.

This last issue, often referred to as “leakage” from the retirement system, could get worse in a recessionary environment and company layoffs accelerate, unless engagement levels are improved and saving outside of retirement accounts is encouraged to create a safety net and preparedness for unexpected expenses.

Why engagement is critical for today’s workforce

Relying solely on an automated approach can enable workers to remain passive participants when it comes to their retirement savings, reinforcing their complacency about participation. Complicating things further, what happens if these workers change jobs and start working for companies that don’t have employer-sponsored 401(k) plans to contribute to? While they can rollover their 401(k) savings to a traditional IRA, they are then responsible for continuing to make regular contributions.

Although participation in 401(k) plans is high at companies that offer them, only about a third of American workers currently invest in a 401(k), according to the U.S. Census Bureau. This is partly due to the changing nature of the labor market. Approximately 40% of the U.S. workforce is now part of the gig economy, working on a part-time, independent or freelance basis. By 2027, more than half of all workers are expected to be fully or partly freelance, according to a survey by the Freelancers Union. Most of these gig workers have little or no access to traditional workplace savings plans. A recent survey by the Pew Charitable Trusts 30% of non-traditional workers had access to a workplace retirement plan like a 401(k), and only one in five currently participating.

How engagement boosts retirement security

While employer-sponsored 401(k) plans have successfully boosted participation rates in recent years, once in these plans, workers also need educational support, so they are better equipped to manage and adjust their retirement strategies over time, and to help them make smart choices.

A 2022 study by the TIAA Institute examined the effectiveness of various strategies designed to increase participation in the federal Thrift Savings Plan (TSP) among members of the U.S. military. It looked at the use of strategies to nudge better savings, including automatic enrollment; automated reminders and prompts; pre-selected savings rates and allocations to make investing simpler; and “active choice,” which requires savers to proactively make a series of informed decisions on key issues such as contribution rates and asset allocation to get them to engage more with their plan. The study found that active choice increased participation rates by nearly 11 percentage points over traditional nudges like reminder prompts and pre-selected savings rates.

This wasn’t the only study to generate this result. Empower Retirement recently examined its own base of retirement savers and found that engaged savers, defined as those who had recently interacted with the company’s advisors, customer care center, website, or app customer care center, show significantly higher savings rates (9.2% vs. 5.7%) and feel more comfortable making investment decisions (54% vs. 20%).

How retirement savers can be encouraged to engage more

With workers stepping in and out of independent gig work and moving through different employers’ 401(k) plans, engagement starts with workers taking ownership of their own retirement savings. That’s why IRA rollovers are so important in today’s system.

Whenever workers who are changing jobs roll their existing 401(k)s into IRAs, they’re forced to engage because their employer no longer acts as an intermediary. It’s at this stage when robust educational support is critical.

Savers need to better understand why saving for retirement, and for life’s other expenses, is so important; why it’s essential to create a safety net (including emergency savings funds) to stay on track even in the event of unexpected surprises; and where to find resources to help them assemble an investment portfolio that’s appropriate for their needs and specific situation.

As savers take control of their retirement savings and become more engaged and proactive, other savings features come into sharper focus, including the importance of having sufficient investment choices to properly diversify and to maximize investment opportunities—such as access to an array of ETFs, mutual funds, alternative assets, and individual stocks and bonds.

This is why providing access to resources, a variety of savings accounts — from Health Savings Accounts (HSA) and Flexible Savings Accounts (FSA) to emergency savings accounts — and an array of investment options is important to us. We are committed to providing investors the services, products, and tools they need to manage their money from the moment they join the workforce to their peak earnings years and through a long and fulfilling retirement.

Learn more about our retirement, workplace and well-being savings solutions.

The material in this Blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Millennium Trust Company performs the duties of a directed custodian, and as such does not offer or sell investments or provide investment, legal, or tax advice.