Retirement Confidence Grows, but Financial Stressors Still Linger
Workers are feeling increasingly confident about their ability to save for retirement and are focusing more on building emergency savings. However, despite this positive shift, financial stressors persist, especially concerning the rising cost of living, credit card debt, and housing costs. Multiple research reports highlight this paradox: while long-term financial stability improves, short-term financial pressures remain a significant concern for many employees.
A recent survey conducted by Betterment at Work, which included responses from 1,000 full-time employees, revealed that the most pressing financial concern over the past year was the increasing cost of living. This was followed by concerns over credit card debt and housing costs. While more workers are taking proactive steps to secure their financial future, immediate financial strains continue to weigh heavily on them.
Financial Stability and Emergency Savings
Encouragingly, the survey found that 63% of respondents reported having an emergency fund, a significant increase from 52% in 2023. The data further revealed a strong correlation between financial stability and emergency savings. Among those who identified as “very/somewhat financially stable,” 82% had emergency savings, whereas only 25% of those facing “moderate/significant financial instability” reported having such a fund.
Despite the rise in emergency savings, an alarming 54% of respondents admitted to using their retirement accounts to cover emergency expenses. Among these individuals, 34% had done so in the past year to cover necessities such as rent, groceries, and medical bills. This underscores the persistent challenge of maintaining financial security amid economic uncertainty. The SECURE 2.0 Act of 2022 has allowed individuals to withdraw up to $1,000 from their 401(k) accounts or IRAs for emergency use without penalty, which has likely contributed to the increased reliance on these funds for short-term expenses.
Millennials, in particular, were the most likely to dip into their emergency savings, and those with student debt were almost twice as likely as those without student debt to do so. This highlights the ongoing struggle younger workers face in balancing debt repayment with financial preparedness.
DC Plan’s Role in Retirement Savings
Defined contribution (DC) plans continue to play a crucial role in retirement savings. According to the survey, 55% of employees desired a higher 401(k) match from their employers, while 18% wanted a 401(k) match applied to student loan payments. Nevertheless, retirement confidence is on the rise, with 72% of respondents expressing confidence in their ability to save enough for retirement, an increase from 68% in 2023.
The Investment Company Institute’s report, “American Views on Defined Contribution Plan Saving, 2024,” found that individuals who own defined contribution accounts appreciate the benefits these plans offer. Nearly 90% agreed that these plans help them focus on long-term financial security and make saving easier. Furthermore, almost half of DC plan participants indicated they would not be saving for retirement if not for their employer-sponsored plan.
Tax Incentives and Retirement Savings
Tax incentives remain a key motivator for retirement savings, with 85% of respondents stating that the tax advantages of their retirement plans encouraged them to contribute. However, as discussions around extending the 2017 Tax Cuts and Jobs Act continue in Washington, there is concern about potential changes to tax-favored programs. Many workers worry that adjustments to these incentives could impact their ability to save effectively for retirement.
Employees Want Income Options in Retirement Plans
Beyond tax policy, there is growing interest in employer-sponsored retirement income options. A Greenwald Research report found that simply participating in a DC plan may not be enough to ensure a comfortable retirement. A substantial 86% of workers expressed a desire for their employers to offer in-plan retirement income options. Additionally, more than half of the surveyed employees believe that employers have a significant responsibility in helping them generate income and develop a withdrawal strategy for retirement.
Plan sponsors, however, remain hesitant due to concerns over the complexity, associated fees, and reputation of annuities and guaranteed lifetime income products. Currently, only 25% of plan sponsors offer at least one retirement income option, while another 30% are considering implementation. The survey revealed a strong need for more education on these options and tools that help employees determine when and how to start receiving retirement income.
Balancing short-term stability with long-term security remains challenging as workers navigate their financial journeys. While increased retirement confidence and improved emergency savings signal progress, financial stressors continue to impact employees’ financial well-being. Employers and policymakers must work together to provide the necessary support, education, and benefits to help employees achieve immediate financial stability and a secure retirement.
Patricia L. Hutchinson
Director of Retirement Plan Services
MBA