A recent study by the Boston College Center for Retirement Research found that 50% of American workers are not on track to save enough to retire without reducing their standard of living. A National Institute on Retirement Security study on the retirement preparedness of American workers showed that: 

  • 1/3 of Americans between the ages of 55 and 64 haven't saved anything for retirement.
  • 38 million working-age households in the United States have yet to start saving for retirement.
  • The average retirement savings for people 10 years away from retirement is $12,000.

Many studies, including a recent study by Vanguard, indicate that workers should save at least 12% to 15% of their income each year. It is likely that most of your 401(k) plan participants are not saving anything near this amount. Following are four ideas on how you can encourage your 401(k) plan participants to save more:

1. Make a budget. Almost anyone can save more and spend less by making a budget. Most participants I talk with have never created a household budget. When I ask them what they spend their money on, many say “it just goes.” If I ask them to be more specific, generally it is hard for them to share how they spend their money. Like most Americans, they live paycheck-to-paycheck. Many people are not financially confident or competent and the addition of a little structure, via a budget, can make a big difference in their lives. 

2. Raise your 401(k) savings rate with each salary increase. The least painful way for most participants to gradually increase their savings rate is to increase it by at least 1% every time they get a raise. That way a portion of each raise is saved but a portion still flows through to their take-home pay. 

3. Collect the full company match. It may be hard to believe, but each client I work with has a sizeable employee population that is not making the maximum employee deferral in order to collect the maximum company match. This is an easy way for many participants to quickly double the impact of saving more.

4. Invest appropriately for your age and risk tolerance. I talk to many participants who started saving late and want to make up for lost savings quickly by investing more aggressively. This is a bad strategy which inevitably leads to failure. Make sure you advise your participants to gauge their risk tolerance by taking an assessment quiz. They should never, ever attempt to make up for lost time by investing more aggressively. Participants who do this are terrified when the markets fall because of how much their account balance decreases. 

Robert C. Lawton is president of Lawton Retirement Plan Consultants, LLC (lawtonrpc.com), an RIA firm helping retirement plan sponsors with their investment, fiduciary, employee education and compliance responsibilities. He may be contacted at bob@lawtonrpc.com or 414.828.4015.

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