Workers often think signing up for their 401(k) is all they need to do. But millions fail to enroll right away or raise their contributions, and they'll pay a heavy price.
Call them victims of inertia. These are folks who are slow to sign up for their employer-sponsored savings plan or who, once enrolled, don’t check back for years. Their numbers are legion, and new research paints a grim picture for their financial future.
More than a third of 401(k) plan participants have never raised the percentage of their salary that they contribute to their plan, and another 26% have not made such a change in more than a year, asset manager TIAA-CREF found. The typical saver stashes away just 8% of income—about half what financial planners recommend. Without escalating contributions, these workers will never save enough.
More than half of plan participants have not changed the way their money is invested in more than a year—including a quarter that have never changed investments, the research shows. This suggests many are not rebalancing yearly, as is generally advised, and that many others are not paying attention to their changing risk profile as they age.
At companies without automatic enrollment, a quarter of workers fail to enroll in their 401(k) for at least a year and a third wait at least six months, TIAA-CREF found. These delays may not seem like a big deal. But the lost returns over a lifetime of growth add up. Based on annual average returns of 6% and a like contribution rate over 30 years, a worker who enrolls immediately will accumulate nearly double that of a worker who starts two years later. Even a mere six-month delay is the difference between, say, $100,000 and $94,000, according to the research.
Employer-sponsored 401(k) and similar plans have emerged as most people’s primary retirement savings accounts: 42% of workers say it is their only savings pool and a similar percentage say the plans are so critical they would take a pay cut to get a higher company match, according to a Fidelity survey. So any level of mismanagement is troublesome.
There is a bright spot, however—younger workers have been quicker to catch on. Millennials are the most likely group to boost their percentage contribution after each pay raise, and among millennials who do not boost the percentage, 23% say it is because they already contribute the maximum. Millennials are also most likely to check back in and adjust their investment mix.
That’s not entirely good news. In general, millennials are not investing enough in stocks, which have the highest long-term growth potential. But it reinforces the emerging picture of a generation that understands what Baby Boomers and Gen Xers were slow to grasp: financial security is not a birthright. Millennials will need to save early and often—on their own—and pay attention for 30 or 40 years to enjoy a happy ending.