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More Americans Are Using Their 401(k)s, but They're Not Saving Nearly Enough

By Christy Bieber - Dec 29, 2017 at 7:21AM

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This one thing made 401(k) participation rise, but average contributions still fell.

Most private sector workers in the U.S. today do not have defined benefit pension plans, which are employer-provided plans offering guaranteed retirement income. Instead, employers frequently offer 401(k)s as a retirement benefit to workers.

A 401(k) is a defined contribution plan: You must contribute to it and invest contributions so they grow to provide retirement income. While your employer may match contributions up to a certain percentage, the burden largely falls on you to fund your own retirement. 

The good news is that participation rates in 401(k) accounts are rising, so more Americans are contributing, according to the Center for Retirement Research at Boston University. This increase comes from more employees being automatically enrolled in 401(k) accounts. When people have to opt out, rather than opt in, many more participate. 

The bad news is that while more Americans are contributing to 401(k) accounts, average 401(k) contributions have actually gone down. This phenomenon can be explained by the fact that people who are automatically enrolled in their 401(k) accounts typically contribute far below the average amount.

Colorful letters spelling out 401k next to a piggy bank

Image source: Getty Images.

Automatic enrollment and 401(k) contributions

According to the Center for Retirement Research, the total percentage of workers who participated in workplace 401(k) plans rose from 79% to 80% between 2013 and 2016. This increase was largely driven by a jump in auto-enrollment.

This number makes the increase in auto-enrollment appear smaller than it actually is, because during the same time period, there was a decline in participation rates in plans that don't use auto-enrollment, which account for more than 50% of all plans. 

Unfortunately, even as enrollment increased, there was a drop in average employee contributions between 2015 and 2016. While more people contributed, the average amount being contributed decreased from 6.8% of income in 2015 to 6.2% in 2016. 

Auto-enrollment was also largely responsible for this slide. Contribution levels for auto-enrollees are typically set at 3% or less, and fewer than four in 10 plans that offer auto-enrollment also automatically escalate the amounts contributed.

While it's a great thing for workers that they're participating more because of auto-enrollment, contributing at a rate of 3% or under is just not going to provide enough income to save for a secure retirement. 

The Bureau of Labor Statistics reported full-time workers earned median weekly earnings of $859 in the third quarter of 2017, making the median salary around $44,668. Contributing 3% of this salary from age 30 to age 65 in a 401(k) earning 7% returns would provide just $185,237 in savings by the time you retire. 

Increasing your contributions 

If you're auto-enrolled in a 401(k) at work, check with human resources or payroll to find out what you're currently contributing. If you're not auto-enrolled but you have access to a 401(k) at work, talk to them about starting an account and making contributions. 

Ideally, you should save at least 15% of your income -- the standard recommendation of saving 10% is no longer good enough because of longer lifespans and lower returns. However, any increase in the percentage of income saved can make a big difference. 

This chart shows how much money you'd have if you bumped your contribution up to a larger percentage of the median $44,668 salary, assuming the same timeline and rate of return as above. 

Percent of Salary

Annual Contribution

Savings After 35 Years










6.2% (average contribution for 2016)












Calculations: Author.

While saving 15% to 20% to get near -- or over -- the $1 million mark is a worthwhile goal, increasing contributions just 1% would cost you less than $450 per year and could give you more than $60,000 in extra savings by retirement. 

Give your 401(k) savings a boost today

While auto-enrollment is great if it increases 401(k) participation and helps more people to save, workers who are enrolled automatically with low contribution amounts are still going to be in rough shape when retirement comes along. 

It's up to you to make sure you're putting enough aside in your 401(k) to have a comfortable retirement. By asking HR to increase your contributions, you can make sure more money is transferred right away to your 401(k) before you have a chance to spend it. 

Increase contributions as much as you can now to boost your savings, and then as your income rises or as you find ways to cut spending, up the amount you save. If you take control over your financial life now, instead of sticking with low contribution rates, you might just become a millionaire by the time you retire. 

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