A new report outlines the coming retirement savings shortfall and calls on the retirement industry, employers, working Americans and financial intermediaries, to come together to develop solutions that improve the savings rate.
"Solving the retirement savings crisis has to be a team effort," says Gary Kleinschmidt, Head of Retirement for Legg Mason and the issuer of the report. "To preserve the American dream of retirement, all key stakeholders must commit to working together to develop new solutions that enhance the financial literacy and retirement savings of American workers."
The report lays out key recommendations for:
- The retirement industry. Defined contribution providers and asset managers must look to develop innovative products and services that enhance defined contribution plans and platforms to encourage greater participation. The industry should also apply lessons learned from the DC plan design to improve the growth of individual retirement accounts, particularly for employees without access to DC plans.
- Employers/plan sponsors. Companies offering a DC plan should commit to improving the quality of their communications and educational initiatives and consider offering access to professional guidance designed to help employees better prepare for retirement. Smaller companies that do not offer a DC plan for their employees should consider taking advantage of solutions developed by payroll service providers and other retirement plan industry participants.
- Financial advisors/consultants. In addition to over-communicating the importance of saving more to better prepare for retirement, financial intermediaries must serve as an advocate for their clients by working closely with plan sponsors to promote transparency and enhance their knowledge and abilities.
- Working Americans. Save more. To start, consider a simple saving strategy characterized by the football term First & Ten. First, get started by enrolling in a dedicated retirement savings account such as a 401(k) offered by your employer; or open an IRA. With the account in place, try to save at least 10 percent of your income in this retirement savings vehicle, a savings rate that would be nearly double the national average.
“First and 10,” and DC
The benefits of implementing a First & 10 strategy in a defined contribution plan offered by an employer are significant. For example, if a 25-year-old worker with no retirement savings and an annual salary of $30,000 implements First & Ten today, he/she could accrue more than $1.2 million in a defined contribution plan that achieves a 6.6% annual pretax rate of return by age 67.*
However, if she/he saves 10% of his earnings annually in a taxable brokerage account with a hypothetical 5% annual after-tax return (equivalent to 6.6% pre-tax), his savings would total just $604,814 at age 67 — significantly less than the savings accumulated in a defined contribution plan.
"The power of employer matching contributions and tax-deferred compounding can't be emphasized enough," says Joseph J. Masterson, Senior Vice President of Diversified. "As the math shows, First and 10 is a simple but effective starting point that can help build a solid foundation for a strong financial future."
