Ask the Expert with Vanguard Retirement talk

Kelly Hahn, Head of Retirement Research at Vanguard, talks through their findings in more detail and expands on some of the solutions Vanguard is offering, as well as the rationale behind them.

The income level of people in your data set tends to skew higher. Can you talk about people on lower incomes and the frequency of their job switches and potential implications?

Kelly: The low wage earners do change their jobs more frequently. Their tenure tends to be shorter. Often times, they’re encountering more friction—savings that don’t escalate as much and having that savings rate reset repeatedly through these job changes.

Has the typical number of employers that the average U.S. worker has over their career changed over time? Do you see this number increasing? If so, would this exacerbate the issues that you highlight?

We do expect more workers to have more jobs over their career as people continue to live longer. Those who are physically able to, and who aspire to work longer, will. As such, with more jobs throughout one’s career, we’re going to see the compounding effect of the declining savings rate on retirement wealth accumulation. It is critical that we manage these savings friction points at job changes.

What is the rationale behind the 6% default savings versus a traditional 3% savings to accommodate a broader range of workers?

This question gets at both the problem and the solution. Oftentimes, many plans default people at the low rate of 3% but do offer auto escalation. After a few years of tenure, they are saving more than the initial rate of 3%. We find in our data that a typical worker was saving close to 6% before changing their jobs. Our solution involves maintaining the savings momentum by defaulting all workers at 6%.

Over half of job switchers decrease their savings rate—even those who secure a 20% pay increase. What explanations might account for this behaviour? How could it be mitigated?

It comes down to 401(k) plan design. There are several layers of plan design issues that we’re highlighting within our research. First, not every employer automatically enrolls—just six out of 10 employers do. And because of participant inertia, workers may go from saving at their prior company to not saving if they join a company with voluntary enrollment design. One in four participants in voluntary enrollment plans becomes a non-saver.

Second, for automatic enrollment plans, the default savings rate is often too low. Many plan sponsors are setting rates at 3% or 4%, which create a reduction in savings as people move through their jobs.

Lastly, four out of 10 workers in our sample actively choose to defy the default savings rate. Even these active savers lose their savings momentum because they use the default savings rate as an anchor or a floor. They choose something higher than the default rate, but that rate is lower than what they were saving at before.

The article continues on page 11 of our Special Report: 'Savings friction'