Engagement Is Key to Boosting Retirement Security | Trust Company of America - Millennium Trust Company

Engagement Is Key to Boosting Retirement Security

February 15, 2022
By Millennium Trust
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On one level, Americans are investing for retirement like never before. Last year, a record 60 million workers contributed to their employer-sponsored 401(k) plans1 while nearly 50 million held assets in tax-advantaged individual retirement accounts (IRA).2

Increased use of auto-enrollment—where employees who fail to make elections are enrolled in employer sponsored plans by default—is likely related to these stronger participation numbers. However, while encouraging, increased saving alone is not enough. Routine interaction with their retirement accounts and engagement in making decisions about their management are also needed. It’s a lack of engagement that 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.3
  • One-third of retirement savers fails to manage investment risk by routinely rebalancing the mix of stocks and bonds in their portfolios to an appropriate allocation for their age and risk tolerance.4
  • More than 30% of workers who leave their jobs every year cash out their 401(k) accounts, many triggering taxes and early withdrawal penalties and negating the benefits of tax deferral that make 401(k)s so compelling.5

This last issue, which is often referred to as “leakage” from the retirement system, is likely to get worse thanks to the recent and persistent Great Resignation currently underway. Over the past 11 months, a record number of American workers have left their jobs voluntarily because they’re burned out or are taking advantage of the tight labor market to make a career move. This increased churn in the labor market could lead to more leakage, unless engagement levels are improved.

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, prolonging their disinterest. Complicating things further, what happens if these workers change jobs for employment that lacks employer-sponsored 401(k) plans to contribute to?

Today, only about a third of Americans currently invest in a 401(k), according to the U.S. Census Bureau.6 Part of that is based on the changing nature of the labor market. Nearly 40% of the U.S. workforce is part of the gig economy, working in part, independently or on a freelance basis.7 By 2027, more than half of all workers are expected to be fully or partly freelance, according to a survey by the Freelancers Union.8 The majority of these so-called gig workers have little or no access to traditional workplace savings plans. A recent survey by the Pew Charitable Trusts found that less than 30% of non-traditional workers had access to a workplace retirement plan like a 401(k), and only one-in-five is currently participating.9

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 study by the TIAA Institute last year 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 leading 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 more than traditional nudges like reminder prompts and pre-selected savings rates.10

This wasn’t the only study to generate this result. Empower Retirement recently examined its own base of retirement savers and determined that engaged savers, defined as those who have recently interacted with the company’s advisors, customer care center, website, or app customer care center exhibit significantly higher savings rates (9.2% vs. 5.7%) and feel more comfortable making investment decisions (54% vs. 20%).11

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 employers are no longer acting as intermediaries. It’s at this stage when robust educational support is critical. This is when savers need to be educated on why saving for retirement 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 educate themselves on how to assemble an investment portfolio that’s appropriate for their needs and specific situation.

As savers take control of their retirement savings and become more knowledgeable, other features come into sharper focus, including the importance of having sufficient investment choices to properly diversify and to maximize investment opportunities. This includes alternative assets in addition to a wide array of ETFs, mutual funds, and individual stocks and bonds.

This is why educational support and providing access to an array of investment options are at the core of Millennium Trust’s rollover IRA business. We are committed to giving investors the 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.

For more information, view our infographic: The Case for Actively Managing Retirement Plans

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.

1401(K) Plan Research: FAQs, Investment Company Institute, ICI.org. October 2021.

2Individual Retirement Accounts: FAQs, Investment Company Institute, ICI.org. October 2021.

3How America Saves 2021, Vanguard. June 2021.

4“The ‘Set & Forget’ Folly: Many Never Rebalance 401Ks,” 401KSpecialist. Dec. 2, 2019.

5“Five Ways to Improve 401(k)s,” The Wall Street Journal. June 19, 2018.

6“Does the Average American Have a 401(k)?” The Motley Fool, June 19, 2017.

7“Freelance Forward 2020,” Upwork and Edelman Intelligence. Sept. 2020.

8“Freelancing in America: 2017,” Freelancers Union.

9“Nontraditional Workers Lack Access to Workplace Retirement Options,” The Pew Charitable Trusts. Oct. 2021.

10“How Do Behavioral Approaches to Increase Savings Compare?” TIAA Institute. March 2021.

11“Empowering America’s Financial Journey,” Empower Retirement. Oct. 2021.

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