Insights to Action: How integrated plan design and financial wellness programs can improve retirement outcomesContributor Katherine Roy
We explore how new research findings from our collaboration with the Employee Benefit Research Institute can help strengthen plan design and financial wellness programs.
The Employee Benefit Research Institute (EBRI) and J.P. Morgan Asset Management have joined forces to collaborate on data-driven retirement research. Drawing on an EBRI/Investment Company Institute database of 27 million 401(k) participants and a JPMorgan Chase & Co. database of 22 million consumers, the research examines actual spending and savings behavior to provide the first truly holistic financial view of U.S. households.
Our inaugural report, the first in a series to be published over the coming months and years, focused on retirement savings. Why do some people save more than others, even when they have equivalent income? We find that the bottom 25% of savers put aside about 3% less than the middle 50%. Increased spending is constraining their ability to save more.
What are the implications of our first research findings, and, more specifically, what can employers do to help the low savers become more like middle savers? Simply encouraging greater savings without offering practical support may leave participants feeling helpless. In this article, we’ll discuss a range of plan design features, workplace arrangements and financial wellness programs that employers can use to help their employees spend a little less, save a little more and, over time, make a meaningful difference in their retirement account balances. When these programs reinforce one another, they are much more effective—strengthening household finances and laying the groundwork for more successful retirement outcomes.
There is no question that a small difference in spending and saving can have a significant impact on retirement success, but how big an impact? Quantifying that impact can help participants make informed decisions in their financial planning and remind them of the added power of the employer match. To illustrate, we take a look at our low and middle savers, who both earn an annual $40,000 early in their career and peak at $55,000 around age 40–45. We define retirement success as having enough income to replace 81% of their pre-retirement peak salary. Social Security will cover 52% of peak salary, leaving 29% that needs to come from a participant’s 401(k) savings.1
The likelihood2 of achieving retirement success is 12 times greater if one saves like the middle savers (consistently at around 5%) vs. the low savers (consistently at around 2%). Each incremental 1% in added participant savings, coupled with a 0.5% employer match,3 can result in an additional $70,000 in the 401(k) balance at the point of retirement. Therefore, an incremental 3% in added participant savings (i.e., middle savers vs. low savers), when coupled with a 1.5% employer match, can result in an additional $210,000 in the 401(k) balance at retirement. It’s a significant amount that can make a real difference in a retiree’s lifestyle.
Small differences in spending and saving can have a significant impact on retirement success
Employee Benefit Research Institute & J.P. Morgan Asset Management Research Collaboration
1 The definition of retirement success is based on J.P. Morgan income replacement research. In deriving the income replacement rate, we consider reductions in income tax and expenditures in retirement and assume that Social Security and private savings must together meet the income replacement rate
2 We determine the likelihood of retirement success based on 10,000 simulations across various market scenarios. Success is defined as the percentage of simulated paths that result in an amount equal to or greater than 81% in income replacement in retirement when combined with Social Security.
3 Our research assumes a 50% employer match up to a 6% employee contribution rate.
This paper was produced by J.P. Morgan Asset Management (JPMAM) alone and includes JPMAM’s view only. The Employee Benefit Research Institute (EBRI) was not involved in the writing of this paper. The paper is informed by research from a previous publication that was a joint collaboration between JPMAM and EBRI.
EBRI is a Washington, D.C.-based organization committed exclusively to public policy research and education on economic security and employee benefit issues.
In an ongoing collaborative effort, the Employee Benefit Research Institute and the Investment Company Institute (ICI) maintain the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project, which is the largest, most representative repository of information about individual 401(k) plan participant accounts. ICI is the leading association representing regulated funds globally, including mutual funds, exchange-traded funds (ETFs), closed-end funds and unit investment trusts (UITs) in the United States, and similar funds offered to investors in jurisdictions worldwide. While this paper uses data from the EBRI/ICI database, ICI did not participate in the research collaboration between EBRI and J.P. Morgan Asset Management and was not involved in the writing of the inaugural report or this paper.
EBRI is not affiliated with JPMorgan Chase & Co. or any of its affiliates or subsidiaries.
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