BenefitsContributorsEngaged WorkforcePayroll

Costly Paradox

Employee confidence is up but savings are down.
 By Ken Haderer
In uncertain times, workforce sentiment doesn’t always mirror workforce action. Even with encouraging economic signs and a greater sense of stability, workers don’t necessarily serve their own best interests when it comes to preparing for retirement. Sure, they may feel better about the economy at large, but when it comes to deepening
their commitment to saving for the future, they can remain reticent, taking the short-term view when a long-term vision is needed.

That’s exactly the evidence we’re seeing in the 2013 Mercer Workplace SurveyTM, a national cross-section of active 401(k) participants enrolled in their employers’ benefits plan. It’s been more than a decade since we instituted the survey — this year’s edition resulted from online interviews with 1,506 participants between late May and early June— and it has been invaluable in guiding us toward a more effective response to employee needs in the benefits administration space.

So what is driving today’s disconnect between employees’ perceptions and their retirement savings? Let’s look at some statistics from the survey. Seventy-seven percent of employees expect economic growth in the year ahead, up four percentage points from last year, and matching the percentage we saw in the post-recession summer of 2010. Improving local home values is a big factor driving that confidence in the economy: 50 percent of all participants expect their home values to be higher a year from now, up 15 percentage points since last year’s survey.

They are also expecting higher company profits and not forecasting growing unemployment. Overall, workers are feeling a bit more secure with a decrease in survey participants considering delaying their retirement (40 percent). What’s more, participants’ confidence in their 401(k) investment decisions is on the upswing, in terms of the investments they select, their asset allocations, and deferral rate. And more of them have a sharply higher appetite for increasing their 401(k) deferrals to the tax- deferred maximum, up six points compared to those who increased to the maximum last year. All of this would be expected in an environment where employees have greater confidence in the overall economy.

And yet it isn’t translating into a bounce in personal retirement savings. With personal incomes remaining relatively flat and GDP growth weak, 401(k) participants
are instead visualizing lower retirement savings in the year ahead. The survey reveals a mean anticipated contribution of about $7,400, 7 percent lower than last year. In fact, while those workers under 50 are at least holding firm, those 50 and over are planning to contribute about 10 percent less than their abnormally high contribution in 2012. This is only the second time in a decade that younger workers expect to contribute more than older ones.

It’s a complex picture, but a key factor helps explain it: anxiety about the cost of healthcare in retirement. Five or six years ago, concern about retirement healthcare costs
was barely on the radar of the Mercer Workplace Survey; now, it’s comparable to more general concerns about having adequate overall retirement savings. Indeed, pre-retirees are not only likely to dial back their 401(k) contributions by about 10 percent, but they are also highly distrustful of the healthcare reforms mandated by the Affordable Care Act, and they expect to be worse off by a ratio of almost six to one.

That may seem paradoxical, and it’s not clear how these workers will respond. Will they save more outside of their 401(k)s, or increase liquidity elsewhere in their portfolios? What we do know is they haven’t chosen their tax-deferred workplace retirement savings plans as the funding vehicle for those looming health care expenses.

Employers need to reinforce a strategy that encourages employees to live, work, and retire well with targeted communications, innovative self-service tools, and expert education. This will help employees truly realize the value that tax-deferred retirement savings can have on effectively managing healthcare expenses in retirement.

Tags: Benefits, Contributors, Engaged Workforce, Payroll

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