Employers have apparently become thriftier with their retirement benefit contributions, according to a new study. Does that spell trouble for your retirement income? Probably, unless you follow a financial discipline that hinges on much more than your employer’s largesse (or the lack of it).
Between 2001 and 2015, employers’ costs of contributing to retirement benefits have declined by 25%, according to a report by the consulting firm Willis Towers Watson. Much of this is due to a shift in benefit type and steep healthcare costs for active workers.
From 9.1% in 2001, employers’ contribution to total retirement benefits as a percentage of pay has gone down to 6.8% as of 2015, as stated by the report. A major part of this cutting back has come from the shift from Defined Benefit (DB) to Defined Contribution (DC). While the DC contribution’s share in pay has increased by +1.6-percentage points between 2001 and 2015, it could not fully offset the -2.9-percentage point drop in DB’s share of pay. Although DC contributions from employers are typically greater compared to their DB plans, the higher DC contributions do not replace the lost pension value (as mentioned in the same report).
Medical benefits for retirees have also dropped to a negligible 0.2% of pay in 2015, compared to 2001’s 1.2%.
Additionally, meeting steeper healthcare costs for active workers could have constrained firms’ spend on retirement benefits. Healthcare costs outpaced pay growth from 2008 to 2015, leading to the ratio of healthcare costs to worker pay climbing +2.4 percentage points over the period. The large share of employers’ benefit-contribution budget is now taken up by active health plan at 63.5%, while retirement benefits took the remaining share. That’s a shift in balance from 2001, when retirement benefits took the bigger share (58.1%). (According to data from the Willis Towers Watson report).
Can Lower Employer Contribution Thwart Your Retirement Goals?
Employers may have become sparing towards your retirement benefits, but that alone should not limit your retirement goals. You can build your nest egg through various ways – an employer-sponsored plan is only but one of them. Moreover, the shift in trend from pre-specified benefits to a Defined Contribution or 401(k) implies that the responsibility of building and preserving wealth is falling more and more on to the individuals’ shoulders. Defined Benefit contribution from employers stands at barely 1% of pay as of 2015.
That’s not all. By relying on company-provided retirement accounts alone, you could run the risk of saving too little. Many automatic 401(k)s default workers into putting away 3% of their salaries. That rate could be inadequate for a comfortable retirement, especially against tangible risks such as market volatility, policy uncertainties and unforeseen ‘rainy days’.
But, there is no need for your retirement income to get cloistered by your employer’s contribution, if you start to take control of your financial future by planning ahead. Moreover, no amount of contribution to your 401(k) will prove fully effective unless the funds are managed by an investing discipline which can help your nest egg grow towards achieving your long-term financial goals. That is why, at Zacks Investment Management, we provide a customized well-diversified portfolio for every client based on their individual investing objectives.
Additionally, we keep our clients up-to-date about contribution limits, income requirements, policies and much more pertaining to different types of savings and retirement accounts, and guide them towards a plan (or, a combination of plans) that best suits their individual financial goals. This includes helping a client strategize on and clean up inefficiencies in their income-and-savings structure.
Bottom Line for Investors
As employers’ contribution to retirement benefits have declined over the years, planning for wealth management becomes all the more crucial for individuals. At Zacks Investment Management, we don’t want our clients to make drastic compromises to their living standards as they approach retirement. That’s why, for building customized portfolios, we review each client’s needs and goals to help them mitigate downside risks from changing policies and/or turns in the market. While doing that, we leverage our in-house tools and database to have unbiased market research. To understand how your current plans are in line with your retirement goals, time horizon and risk tolerance, call us at 1-888-600-2783.
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