Jar Of Money

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I think we all know that America is way behind on retirement savings.

But when I read this new stat, my jaw hit the floor. Because, according to a new report from the Pew Charitable Trusts (which you can see here), the average American has $72,383 stashed in a 401(k), which sounds encouraging.

However, the average can sometimes be misleading, because a large balance in a few 401(k)s can skew the result -- after all, consider a hypothetical example of five people with a combined 401(k) savings of $500,000. The average is $100,000, which sounds pretty good until you discover that one person has $450,000, two people have $15,000, and the other two have $10,000 each in their 401(k)s.

That's why I prefer to look at the median: It gives a better indication of the population, as you know that half of 401(k) balances will be below that number and half will be above.

Unfortunately, the median paints a much grimmer picture. According to the Pew report I mentioned above, the median 401(k) balance in America is $18,433.

Two systemic reasons why 401(k) balances are so low

Millions delay enrolling in 401(k)s -- or don't enroll at all. This is in large part because of status quo bias. The idea behind status quo bias is that people tend not to change things unless they see a clear need for change. (Ever put off doing paperwork because it wasn't your top priority? Yeah, me too.) It's one of the reasons why millions of Americans who have access to 401(k)s delay enrollment; it's just one more piece of paperwork, and they have other things to do.

Workers simply aren't saving enough. Many will simply enroll in their 401(k) at whatever the automatic rate is and ignore it after that. An analysis of Vanguard plans revealed that 65% of plans had an automatic rate of 3% or less -- not nearly enough for most workers to build a sufficient nest egg.

The shockingly simple solutions to these problems

Status quo bias isn't inherently a bad thing -- and in fact, it can be used to benefit workers. One of the key benefits of the 401(k) is the fact that savings are automatic (and, often, forgotten) -- meaning that status quo bias encourages saving through a 401(k). A few simple tweaks can extend those benefits even further.

401(k) delays can be largely wiped out if employers make 401(k) enrollment automatic so that workers have to opt out if they don't want to save for retirement. The data backs this up: Among Vanguard plan sponsors, 401(k) plans with automatic enrollment had an 89% participation rate, compared to just 61% for plans lacking automatic enrollment.

401(k) plans can easily juice their savings numbers in three other ways.

First, plan administrators can increase the default contribution rate. Given that most financial planners recommend workers save 10% or even 15% of their annual salaries, automatic enrollment at 3% or less is far too low. Imagine, instead, if the benchmark were set at 6% or 8% to start.

Another easy change is to include automatic savings increases in the plan. So if someone starts at, say, a 6% deferral, then in the following year the plan might automatically increase that to 7% (and to 8% the year after) unless the worker adjusts their contributions. Vanguard ran the numbers in late 2013, using the example of someone with a $40,000 salary who contributed 4% a year. If that person increased their deferral by two percentage points annually (so, from 4% to 6% in year one, 6% to 8% in year two, etc.), then that worker would save an extra $100,000 over a 20-year period.

Finally, employers should consider spreading out their matching funds. Many companies will match $0.50 on the dollar of the first 6% workers contribute to their 401(k) plans -- but that same amount of money could be better used by matching $0.25 on the dollar of the first 12% workers contribute. That motivates employees to put more money aside beyond the default contribution rate the employer sets.

Fight for the best retirement plan you can get

Without a push from employees, your employer will likely keep the 401(k) plan they currently have -- warts and all. (HR reps are not immune to status quo bias.) Go advocate for change so that you, your colleagues, and the workers that come after you can have the best possible retirement plan.

And even if your employer won't change the rules of your 401(k), you can make most of these changes in your savings. Take a look at your budget and see if you can increase your deferral right now. Then set a calendar invite to increase your deferral each year. While that's not the broad systemic change we might all want, you can at least make sure that your 401(k) quickly grows to a lot more than $18,433.

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