The “Action Gap”: Why Workers Refuse to Save More for Retirement

New research uncovers a vexing problem: The typical worker can readily find an additional 5% to 10% in their budget to put away for retirement. But they don't do it because they are unsure what moves to make.

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The need for workplace financial education has never been more evident. Survey after survey shows that most Americans are not saving enough to retire. Now comes word that workers generally have room in their budgets to ratchet up savings — but simply do not know how to go about it.

The vast majority of workers—83%—say they could cut their household budget by 5% in order to save more, according to a new report from State Street Global Advisors and Boston Research Group. Many others have room to save even more: 64% say they could cut costs by as much as 10% right now, and put it in savings; 52% said they could save an additional 10% if their employer automatically increased their plan contribution rate by 1% a year.

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This “action gap” is further illustrated in the poll’s finding that 78% of defined-contribution plan participants say they know it is important to determine how much to save for retirement—but only 33% say they know how to go about doing so. The bottom line: A lot of people are under saved and know it; they have the financial flexibility to do something about it but lack the confidence or knowledge to make a change. From the survey:

  • 67% know that adjusting their portfolio over time is important but only 30% know how to do it.
  • 82% know it is important that they make their savings last a lifetime but just 28% know how to do it.
  • 40% are uncertain about the basic differences between stock index funds, stable value funds and actively managed stock funds.

Without a better understanding of their options and what actions to take, many workers simply do nothing even though they know that is the wrong course. The action gap probably could be closed through one-on-one financial counseling at the office. Research is mixed on workplace financial counseling. But employer-sponsored advice appears effective in the area of retirement savings, especially among low earners.

Companies have begun to embrace one-on-one sessions with workers, which The Principal Financial Group recently determined is the best way to reach adults when it comes to offering lessons about how to manage money. The State Street survey seems to agree.

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It found that employees who engage more frequently in conversations about retirement show higher knowledge and awareness levels than those who do not. “Employers should be encouraged to engage with participants more regularly about retirement and to repeat messages regularly using different mediums—from print and video to call centers and conversations with financial professionals,” State Street concludes.

The workplace is a key battleground in the fight against finanical illiteracy. Companies have systematically removed an important safety net—the traditional pension—the past few decades. It may now be incumbent on them to help workers do a better job preparing for life after work. Closing the action gap is a great place to start, and research suggests the best way to do that is through one-on-one counseling on company time.

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