Actuarial & Employee Benefits Consultancy

401(k) RETIREMENT READINESS STUDY

Fall 2010 Release | Executive Summary

RESEARCH LED BY:

Thomas Totten,
Craig Harrell

A member of Alliance Benefit Group

Copyright 2010. All Rights Reserved. For use for academic, non-commercial use. A commercially
licensed version of this report with expanded data is available at www.nyhart.com.

LEGAL NOTICE: While every effort is made to ensure that the content of this study is accurate, Nyhart
makes no representations or warranties, expressed or implied, in relation to the data used to complete
the study. In no event will Nyhart be liable for any incidental, indirect, consequential or special damages
of any kind, or any damages whatsoever arising out of or in connection with the use of this study.
Nyhart reserves the right to revise and amend this disclaimer notice from time to time and any revised
version will be deemed to be applicable from the first date of publication on Nyhart.com.
Executive Summary
As increasing numbers of defined benefit (pension) plans
are frozen or terminated, the 401(k) benefit has
emerged as the foundation of retirement income for most
employees. The recent economic downturn and the impact
it has had on retirement plans for baby boomers has raised
a red flag on the vulnerability that millions of Americans face
if their 401(k) fails to meet their retirement needs.

Nyhart, one of the nationʼs largest independent actuarial and

employee benefits consulting firms, has conducted a study
of more than 10,000 employee accounts to analyze and
evaluate the readiness and capability of employees
to retire by the age of 65, the common age most consumers
correlate with retirement.

The study has found:

• 81% of adults 18 or older will not be able to afford to retire

by the age of 65.
• The leading cause affecting employeesʼ ability to retire at the
age of 65 is their failure to contribute enough of their income
towards retirement; not which investment funds they chose or
the level of contribution their employerʼs match.
• Employees above the age of 55 on average need to contribute
more than 45% of income going forward to retire by the age of 65.
Employees age 45-55 must contribute on average 19% to make
retirement possible by 65.
• The average employee relying on the 401(k) as a primary
retirement vehicle will not be able to retire until 73 years of age.

2 | Copyright 2010 | Nyhart | www.nyhart.com

Behind the study
We have observed a recent surge in 401(k) plans that has introduced
options to simplify participant decisions within these plans, such as
automatic enrollment, automatic escalation and the default choice of
target date funds.

Today, the level of the account balance at a participantʼs desired

retirement date remains the ultimate metric of success for 401(k) plans.
We believe this thinking is fundamentally incomplete and has prompted a
gross misunderstanding of what an employee should be focused on.

Based on a few factors identified from our experience consulting and

administering retirement benefit programs, we assigned a research team
to look at what was prompting these gaps as well as to analyze a
database of more than 10,000 U.S. adults from 110 small, midsize and
“An employee’s level of
large public and private employers to identify what must change. contribution is the single
Our research quickly confirmed our suspicions. An employeeʼs level of
contribution is the single greatest factor in determining if they will retire on greatest factor in
time. It is also the only major factor the employee controls in the overall
investment return. An analysis of the traditional 401(k) benefit shows that, determining if they will
historically, employees have not been given the appropriate tools to
appreciate the importance of this decision. Little or no time, especially retire on time.”
early on, is spent educating employees on how contributions today impact
the age at which they will retire. As such, they spend more time thinking
about which funds to invest in, not how much to contribute.

This study reveals how contributions are impacting the overall retirement
landscape and provides insight into how the 401(k) is currently being
utilized by employees.

Undoubtedly, employeesʼ attitudes must shift, or the 401(k) will need an

overhaul to fulfill the employersʼ need to have their work force retire on
time and to meet the employeesʼ desires to retire when expected.

3 | Copyright 2010 | Nyhart | www.nyhart.com

73
4 | Copyright 2010 | Nyhart | www.nyhart.com
“Based on today’s level of contribution
and participation, the average employee
cannot afford to retire until the age of 73.”
What % of income is being 20  
Average contribution rate by age group

18  
set aside for retirement? 16  
For most, not nearly enough. As employees age, their allocation % 14  
to retirement increases. Our research revealed the peak age of 12  
contribution is from employees 55-64 years of age, where the 10  
salary is at its highest, but the impact of compound interest is 8  
nominal, giving these older employees less benefits than 6  
younger counterparts. 4  
2  
Total contribution rates (employee and employer combined %) 0  
averaged 9.48%, including those who do not contribute. 0-­‐24   25-­‐29   30-­‐34   35-­‐39   40-­‐44   45-­‐49   50-­‐54   55-­‐59   60-­‐64  

Failure to contribute at earlier points in the employeeʼs career

has dramatic consequences in the ability to retire on time. Among our data pool, a staggering 15% are not contributing at all.

Contribution percentages varied with age, generally increasing as participants came closer to retirement. Employees just entering the work
force had an average total contribution rate of just 4.8%, while the oldest age groups peak at 18.0%.

Do those who make more 16  

Average contribution rate by salary level

14  
also contribute more? 12  
10  
Yes, coinciding with the typical increase in income as the
% 8  
employeeʼs career progresses. Within the data pool, as
6  
employees earn more they are more likely to contribute
4  
more to retirement. However, Social Security benefits
2  
decline as a percentage of income for participants with
0  
greater wealth, creating an offsetting effect and further
emphasizing the importance of contributions early on.

5 | Copyright 2010 | Nyhart | www.nyhart.com

At what age should we
Projected  re5rement  age  by  age  group  

expect to be able to retire? 76  

The average projected retirement age for all employees in 75  

our study was 73. This result was derived from a sample 74  
inclusive of all employees in the database who met our
career-service criterion. Employees who are 65+ were 73  
most dramatically impacted by the economic recession and 72  
Age
should expect to work 10 or more years to afford
retirement unless they significantly increase their percent 71  
of income contribution immediately. 70  

Average projected retirement ages were not significantly 69  

lower for younger employees, a counterintuitive result 0-­‐24   25-­‐29   30-­‐34   35-­‐39   40-­‐44   45-­‐49   50-­‐54   55-­‐59   60-­‐64  
given that younger people are generally assumed to fare
far better in 401(k) plans as a result of asset compounding
over time. Younger participants are not reaping the
benefits of this dynamic because the vast majority are
failing to contribute enough early in their careers. Projected  re5rement  age  by  salary  level  
80  

“Employees who earn 78  

76  

more are more likely to 74  

72  
retire on time.”
Age
70  
68  
Participants who earn between $60,000 and $70,000 per 66  
year have the lowest projected retirement age at this time, 64  
69.9 years. Those who earn less than $25,000 per year
have the highest projected retirement age at age 77.9.

6 | Copyright 2010 | Nyhart | www.nyhart.com

What % of employees can expect
to retire at age 65?
“7 in 10 adults ages 24 or
35  

30  
younger are not projected
25   to retire by age 65.”
20  
%
15  

10  

5  

0  
0-­‐24   25-­‐29   30-­‐34   35-­‐39   40-­‐44   45-­‐49   50-­‐54   55-­‐59   60-­‐64  

“Only 19% of all

While younger employees have the greatest chance of retiring by 65,
nearly 7 in 10 employees age 24 or younger are not projected to retire by employees are on track to
65.

Overall, only 19% of the population is on track to retire at age 65. When
retire at age 65.”
stratifying the data to find the current age cohort most likely to meet its
retirement goals, the youngest participants have the highest percentage
of participants retiring at age 65, with 32%. (This group performed poorly
in the prior average retirement age test due to the high number of non-
contributors, who made up a staggering 30% of this age group.)

7 | Copyright 2010 | Nyhart | www.nyhart.com

 Employees 24 and under
are failing to contribute
now, the time in their
lives when they
can most impact
the age they
Contribu2ng  
will be when
<3%   they can
0%  
afford to
retire.

>10%   % of income employees

age 24 and under are
currently contributing.

5-­‐10%   3-­‐5%  
8 | Copyright 2010 | Nyhart | www.nyhart.com
Small increases in contributions today would dramatically
increase how many employees will retire by age 65.
70  

60  

50  

40  
Current  Projec5on  
%
30   Increase  2%  
Increase  4%  
20  

10  

0  
24  and  under   25-­‐29   30-­‐34   35-­‐39   40-­‐44   45-­‐49   50-­‐54   55-­‐59   60-­‐64  

Our researchers analyzed how just a small incremental increase in

contribution would impact how many employees would retire on time. An
“If employees under the age of
increase of 2% of pay in each participantʼs contribution causes the rate of
retirement goal attainment to increase from 19% to 28% for the whole
30 increased their 401(k)
population. If the contributions are increased by 4% of pay, the success
rate moves to 36%.
contribution by just 4%, twice
If employees under the age of 30 increased their 401(k) contribution by as many would be able to
retire at the age of 65.”
just 4% of pay before the age of 30, twice as many would be able to retire
at the age of 65.

9 | Copyright 2010 | Nyhart | www.nyhart.com

Conclusion
Without examining their ultimate effects on outcomes, previous
studies of 401(k) plans examined the various input factors to 401(k)
plans, such as employer contribution rates, employee contribution
rates and account balances.

Though giving a cursory treatment of retirement readiness, results

of previous studies were stated in terms of an account balance, a
percentage of final pay replacement or a multiple of pay.

Nyhart believes the appropriate and most easily understandable

way to express projections of employee retirement readiness is in
terms of a projected age at retirement. Only once participants have
been given the opportunity to internalize these results will a change
in contribution and savings behavior be possible.

10 | Copyright 2010 | Nyhart | www.nyhart.com

 Methodology
Nyhart examined numerous studies by industry experts that attempted to estimate
various retirement income scenarios. For this report, Nyhart assumed that an
employee would need to replace 70% of the final yearʼs income, plus Social
Security, for the rest of the employeeʼs life, a methodological assumption which
Nyhart believes is a refinement of those previously employed.

Nyhart examined 401(k) participant data from 110 companies, including only
participants who would potentially work a full career (deemed to be 30 years) with
the employer. This assumption limits the skewing effect produced by employees
hired late in their careers who do not roll prior retirement balances into the plan.

The participantsʼ retirement contribution behavior was projected into the future
assuming both employee and employer contributions would continue until the
appropriate retirement age.

11 | Copyright 2010 | Nyhart | www.nyhart.com

About Us
Nyhart is one of the nationʼs largest independent actuarial
and employee benefits consultancy, operating since 1943.

The firm began as a family-owned business founded by

Howard E. Nyhart. It progressed as a family business until
an employee stock ownership plan was created and the
employees purchased the company in 1991.

Nyhart is composed of actuaries, consultants, attorneys,

accountants, and administrators, many of whom have prior
experience working at international consulting firms.

The company was named a 2009 Indiana Company to

Watch by the IEDC and is regularly recognized as a top
place to work in Indiana. Learn more at www.nyhart.com.

For more information contact:

James Burnes, public relations, (317) 512-3612,

media@nyhart.com

Thomas Totten, CEO and senior actuary, (317) 845-3500,

thomas.totten@nyhart.com.

A licensed, commercial version of this report is available by

contacting Nyhart at connect@nyhart.com.

12 | Copyright 2010 | Nyhart | www.nyhart.com