Save now: Saving our way out of a retirement crisis
It's a simple but unsettling reality: Most Americans are not financially prepared for retirement. More than half of all workers say they have less than $25,000 in total savings and investments, and almost one-third report less than $1,000.1 Compounding the challenge is that retirement is just one of several priorities competing for attention—and resources—in an individual's broader financial picture. In a recent survey of defined contribution plans recordkept by T. Rowe Price, saving for retirement ranked third behind debt reduction and rainy day accounts when participants were asked how they would allocate excess funds.2
Current research demonstrates convincingly that disciplined saving is a primary determinant of financial success in retirement for defined contribution participants.
Independent studies consistently find that savings rates have more impact on retirement income than asset allocation, investment performance, and fees.
An initial 6% savings rate with 2% annual increases up to 20% in a defined contribution plan results in significantly more assets at retirement than a static approach with similar or lower savings rates—assuming identical investment performance and time horizon.3
The bottom line: Higher balances mean more retirement income potential.
graph To help investors calculate how much they may be able to spend in retirement, and how long their savings will last, T. Rowe Price created the Retirement Income Calculator.
Sponsors, advisors, and consultants are in a unique position to help employees maximize their opportunities for financial success in retirement. Individual savers gain the support they need to develop a savings plan and stick to it, while sponsors, advisors, and consultants can potentially alleviate concerns that their participants are not saving enough to achieve a successful retirement.

Unfortunately, the barriers to improved savings behavior are steep. Individuals must balance everyday living expenses against other priorities, such as financing a child's education or helping with an aging parent's medical care. The Pension Protection Act (PPA) provides useful guidance for retirement plan sponsors but suggests a 10% cap on automatic increase—a level that we believe is insufficient to achieve financial success in retirement. And although many employees are counting on Social Security as a financial safety net, our analysis indicates that Social Security may replace only about 20% of preretirement income, leaving the remainder to be replaced by other sources, including personal savings and, in some cases, defined benefit plans.

To overcome these barriers, T. Rowe Price recommends a shift in our collective approach to prioritizing financial decisions. We should dedicate more of our time and resources to encouraging increased savings. In addition, we urge service providers, plan sponsors, and government to work together—along with individual investors—to solve America's savings shortfall.
1. Get more out of automatic increase
Drive savings by encouraging opt-out automatic increase at 2% per year up to 20% (or the IRS contribution limit in 2012 at $17,000).
PPA guidance suggested capping automatic increase at 10%, but our experience has shown that individuals tolerate larger increases and higher maximums than most plans adopt.4 Longer term, we feel this guidance should be addressed at the government level.
Only 7% of eligible participants sign up for automatic increase as an "opt in" service, but 60% use the service when offered as an "opt out."5
2. Target and personalize employee interactions
Target communications to those individuals most at risk of under-saving.
Our research indicates that personalized communications can increase defined contribution deferral rates by 80% or more.6 Through the third quarter of 2011, our:
• Participation statements garnered a 5.9% response rate, with deferral rates among respondents nearly doubling from 2.8% to 5.3%.
• Annual increase statements achieved a 6.4% response rate, with deferral rates among respondents climbing from 4.7% to 8.7%.
• Total retirement outlook statements prompted 3.4% of respondents to increase deferrals, with contributions nearly doubling from 5.1% to 9.4%.
3. Help savers help themselves
Incentivize savings through matching contributions:
• Plan design and match structures vary widely. Studies by the Employee Benefits Research Institute (EBRI) suggest that 70% of employees not participating in an employer-sponsored retirement plan indicate that they would be more likely to contribute if an employer matched 100% of the first 5% of participant deferrals.
• T. Rowe Price recommends that sponsors, advisors, and consultants investigate different match structures in the plans and change the match if necessary to maximize individuals' savings.
Promote best practices for automated services:
• Automatic enrollment: Participation rates in T. Rowe Price recordkept plans with automatic enrollment are 70% higher than plans without automatic enrollment.7
• Annual reenrollment: Although 90% of defined contribution plans nationwide feature automatic enrollment for new employees, less than one-third use it for existing nonparticipating employees.8
• Higher default deferrals: Two-thirds of defined contribution plans have an initial default of 3% or less.9 Our research indicates that employees accept a significantly higher initial default rate.10 T. Rowe Price recommends 6%.
Asset allocation, performance, savings consistency, fees, and other sources (e.g., Social Security or defined benefit plans) all directly influence retirement outcomes, but the impact is not proportional. Evidence overwhelmingly demonstrates that savings levels drive retirement success. In light of this fact, T. Rowe Price challenges sponsors, consultants, advisors—and individuals—to join us in focusing our efforts on promoting higher savings rates.

The potential benefits are immediate and lasting. For individuals, savings rates are one factor they can easily control and are a key driver of increased income in retirement. For business partners, reallocating time, energy, and resources toward improving savings today could potentially lessen the burden of other concerns.

The next step is clear, Act on our recommendations:
Get more out of automatic increase
Target and personalize employee interactions
Help savers help themselves
If you need help, call T. Rowe Price, your advisor, or your consultant. Working together, we can change America's savings behavior for the better and help our workers achieve the retirement they deserve.