An Often-Overlooked Key to Maximizing Your 401(k)

New Study Reveals What over One-Third of Americans Fail to Do

Winnie Sun
Financial AdviserPRO+ in Irvine, CA

401(k) Retirement Investing & Retiring

An Often-Overlooked Key to Maximizing Your 401(k)
May 16, 2016

With the decline of defined benefit plans such as pensions, more people are relying on defined contribution plans such as 401(k)s for their retirement needs. Since the future solvency of Social Security is occasionally called into question, it is important that you pay close attention to your 401(k) and whether the amount you are putting away is sufficient to handle your retirement plans.

An August 2014 survey by TIAA-CREF Financial Services looked into the habits of 401(k) owners and found one surprising fact: 36% of Americans that contribute to employee-sponsored retirement plans never change the amount of their contribution. Another 26% of workers had not increased the contribution amount in more than a year.

While a “set it and forget it” philosophy is better than not contributing at all, failing to increase your contributions could leave you short at retirement.

Financial experts typically recommend putting away 10-15% of your income for retirement, with a further increase as you approach retirement age. A prior TIAA-CREF survey found that 44% of employees save no more than 10% of their yearly annual income. Combine the results of these two surveys, and it appears that a significant number of us are in for a rough retirement. But who will it be?

Millennials (workers aged 18-34) appear to be taking better care of their retirement plans than the preceding generations that are approaching retirement. Perhaps those of us whose careers spanned the boom time of the ‘90s became too complacent with our retirement plans, and when the harder times hit, debt and other lifestyle expenses made it difficult for us to catch up.

Millennials have had to weather difficult economic times, including the Great Recession, and many act as if an encore could occur. The survey showed they were more likely to increase their savings after a raise (52% compared to an average of 43% across all respondents). Another 23% did not increase their contribution because they couldn’t —they were already at the maximum contribution limit.

Overall, 25% of respondents did not increase contributions after a raise because their contributions were maxed out, but the main reason given for not raising contributions was the need to divert the raise toward paying expenses (presumably including paying down debts).

Automatic enrollment cannot solve the problem of not raising contribution levels, but it can at least direct people to start saving earlier. 53% of companies in the survey had opt-in 401(k) plans instead of automatic enrollment, and without automatic enrollment, people inevitably delayed their signup.

The survey showed that while 41% of those without automatic enrollment signed up within three months, another 15% signed up within the next three months, and 13% in the six months after that. 10% took two years or more to begin making 401(k) contributions.

Even with the warnings, there are some positives within this survey. The fact that millennials are more likely to engage in sound retirement savings practices suggests that the people who can do the most to change their situation are doing so. It remains to be seen if this translates to the next generation.

Meanwhile, the survey indicates that workers who are approaching retirement age are doing the least to maximize their retirement dollars through 401(k) plans. Even though it will have less effect now, it is never too late for you to start more prudent retirement savings practices. Adjust your 401(k) contributions accordingly, or be prepared to scale back your retirement plans.

Winnie Sun is a registered representative with, and securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Sun Group Wealth Partners, a registered investment advisor and a separate entity from LPL Financial.

Let the free MoneyTips Retirement Planner help you calculate when you can retire without jeopardizing your lifestyle.

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