A new report from Aon Hewitt, the global talent, retirement and health solutions business of Aon plc (NYSE: AON), shows that women save less for retirement and are more likely to default on loans taken out of their retirement savings than their male counterparts. These savings and investing habits, coupled with longer life expectancies, play a critical role in why women are less likely than men to be able to meet their financial needs in retirement.
Aon Hewitt's analysis of more than 140 defined contribution plans representing 3.5 million eligible employees shows that while women are participating in their employers' defined contribution plans at the same rates as men, they save less-an average of 6.9 percent of pay, compared to 7.6 percent for men. In addition, nearly a third (31 percent) of women contribute below the company match threshold, compared to just a quarter of men. As a result, women have average plan balances that are significantly less than men, consistently across all salary ranges. Overall, the average plan balance for women is $59,300, compared to $100,000 for men.
Aon Hewitt's research shows that combined, these factors leave many women woefully underprepared for retirement. According to Aon Hewitt, full-career contributing women should have 11.2 times their final pay to meet their retirement needs, but they are actually on track to accumulate only 8.6 times final pay-leaving a shortfall of 2.6 times pay. By contrast, males have a projected shortfall of only 1.9 times pay.
"Women face a number of challenges when it comes to saving for retirement including gaps in their career when they are not actively contributing to their retirement and longer life expectancies, said Patti Balthazor Björk, director of Retirement Research at Aon Hewitt. "However, there are factors that women can control to boost their retirement savings, such as how much they contribute, how they invest over time and whether they keep assets within the retirement system."
Women More Affected by Retirement Leakage
Taking funds out of retirement savings prematurely, or leakage, contributes to women's retirement savings shortfall. Aon Hewitt's analysis shows that while women and men take loans from their retirement savings at similar rates, women are more likely to default on a loan at job termination than men. Nearly three quarters of women (71 percent) who terminated employment with an outstanding loan defaulted on the loan, compared to 64 percent of men.
"There is little impact to long-term savings if loans are repaid in full and if individuals continue to contribute to their retirement savings while they repay the loan," explained Björk. "However, the real threat to financial security comes when participants default on loans, most often at job termination. Unpaid loans are subject to taxes and penalties that create a permanent loss from workers' retirement savings."
Helping Women Close the Gap
Aon Hewitt suggests women take the following actions to help them build a larger retirement nest egg:
Invest more and begin investing earlier. Women can significantly increase their final retirement savings balances simply by increasing contributions and/or starting to save earlier. Aon Hewitt's research shows that in order to accumulate adequate retirement savings, individuals without pensions would need to have at least 15 percent of compensation set aside every year if they start saving at age 25. Starting the process at age 35 increases this amount to nearly 25 percent of pay every year. An Aon Hewitt analysis shows that increasing retirement contributions by as little as 1.0 percent each year for five years and maintaining that higher savings rate until retirement can allow the average employee to retire at age 65 with adequate savings.
Take advantage of employer matching contributions. Women who are contributing below their company's match threshold are essentially missing out on free money. Increasing 401(k) contributions to the match level will boost women's long-term savings outlook. As an example, the average woman, receiving a company match level at $1.00 per $1.00 up to 6.0 percent, who is contributing 3.0 percent of pay to her 401(k) will have $772,500 at retirement age. However, had she saved the full 6.0 percent of pay (the typical company match level), she could have $1,545,000 at retirement age-double the retirement savings.
Make the most of automatic features. Automatic features, such as automatic contribution escalation, can help women gradually increase the amount they are saving for retirement with minimal effort. However, in many retirement plans, workers must actively choose this option. Aon Hewitt's research shows that only 15.4 percent of women enroll in automatic contribution escalation. Women should take advantage of this feature when it's offered.
Avoid leakage. Leakage from retirement savings is a large threat to women's financial security. While there may be times when women need to turn to withdrawals or loans from retirement savings to cover expenses, they should tap these funds only as a last resort and only for true hardships. Women should avoid taking loans and, when loans are necessary, limit the number of loans they take at any one time to reduce the risk of defaulting.
Take advantage of "help" tools. A report from Aon Hewitt and Financial Engines demonstrated that workers who use help tools, such as target-date funds, managed accounts and online advice, fare better than those who go it alone. Those employees taking advantage of help experienced annual returns nearly 3.0 percent higher (292 basis points, net of fees) than those individuals managing their 401(k)s on their own. Women should take advantage of the tools their employer makes available to help them make smarter investment decisions.