Report says upping starting contribution increases secure retirement

Workers’ likelihood of a financially viable retirement would, not surprisingly, be significantly improved by setting a higher starting point for 401(k) contributions, new research from the Employee Benefit Research Institute shows.

The Pension Protection Act of 2006 and most private sector employers recommend an automatic enrollment level for 401(k) plans at 3% of pay, but many financial experts say this level is far too low to generate assets for a comfortable retirement.

EBRI evaluated the impact of raising the default contribution rate on younger workers (with 31 to 40 years of simulated 401(k) eligibility) to see how many would be likely to achieve a total income real replacement rate of 80% at retirement by raising their starting rate to 6%.

More than a quarter (25.6%) of those in the lowest-income quartile who had previously not been modeled to have a financially “successful” retirement (under the actual default contribution rates) would be successful as a result of the increase in starting deferral rate to 6% of compensation.

Even workers in the highest-income quartile would benefit, although not as much: Slightly more than 18% who would not be successful under the actual default contribution rate would be successful due to the higher 6% default rate.

“This study shows that substantial increases in success rates were found for both low- and high-income employees if employers raised the default 401(k) contribution rate to 6% of pay,” says Jack VanDerhei, EBRI research director and author of the report.

Eighty percent or real income replacement is within the usual range of retirement replacement rates advocated by fiscal consultants.