Increasing disconnect between retirement plan expectations and worker preparedness
Planning for retirement was considered a relatively simple matter a generation or so ago. Work until age 65, receive a pension, and enjoy a long retirement. Unfortunately, few workers today have access to a traditional retirement. Those who have an employer-provided retirement plan are in better shape than those who don’t and who will end up relying on Social Security benefits as their sole source of retirement income.
Nonetheless, many workers with retirement plans are falling short and may not be adequately prepared for what may turn out to be a longer-than-expected retirement. In fact, a new report1 sought to quantify the level of financial stress plan participants feel as well as to assess retirement readiness across all our major generations: Gen Z (ages 18 – 28), Millennials (ages 29 – 43), Gen X (ages 44 – 57), and Baby Boomers (ages 58+). The researchers found different degrees of financial stress across all four generational groups and noted that there was a disconnect between the expected length of retirement and worker readiness for all groups.
Here are some of the report’s key findings:
44%—Workers who feel their financial situation is fair or poor
53%—Workers who feel their debt is a problem
50%—Workers who say their retirement savings are behind schedule
32%—Workers who expect to retire later than planned
40%—Workers worried about health care costs in retirement
44%—Workers worried about paying for food and other basic expenses in retirement
The burden of financial stress
Increases in the cost of food, utilities, gas, and other goods and services are putting a severe strain on household budgets. Add housing affordability, the struggle to repay student loan debt, and health care expenses into the mix and it is not difficult to see that many working Americans are having a hard time dealing with a broad range of financial stressors.
However, the research shows that the numbers vary by demographic group. For example, 52% of Gen Zers, 53% of Millennials, 49% of Gen Xers, and 34% of Baby Boomers feel their finances are fair or poor. In addition, 58% of Gen Zers, 64% of Millennials, 59% of Gen Xers, and 42% of Baby Boomers consider their debt a problem.
The ripple effects of this financial stress can have an impact on both employers and the larger community. Employees who are under a high level of financial stress may take their problems with them into the workplace. In fact, the report notes that, on average, people spend nearly five hours a month on finances at work and that there has been a 4% rise in people taking time off from work due to financial stress.
Moreover, prior research has shown that employees who are experiencing financial challenges may feel that they can’t afford to participate in their employer-provided retirement plan or boost their contribution percentages.
Expected retirement age and retirement readiness
The researchers found that Gen Z identified 59 years of age as the ideal retirement age, much lower than other generational cohorts. However, it’s apparent from the data that all generational groups highlight ideal retirement ages that are below their expected retirement ages. A significant number of all groups feel that they are behind in their savings goals for retirement. Significantly more than half of Millennials and Gen Xers felt that they were behind in saving for retirement, yet members of both generational cohorts identified their ideal retirement ages as 61 and 64 years, respectively. The disconnect between reality and expectation is a serious issue and shows how much more work remains when it comes to helping plan participants deal with the realities of retirement planning.
Generation | Expected retirement age | Ideal retirement age |
|---|---|---|
Gen Z | 67 years | 59 years |
Millennials | 69 years | 61 Years |
Gen X | 69 years | 64 Years |
Baby Boomers | 69 years | 67 years |
The report also sought to identify whether the members of different generational groups were saving enough to meet their retirement goals or were falling behind schedule. Prior research has noted that retirement plan participants underestimate just how many years they will spend in retirement. It is critical that participants contribute enough to their retirement plans to allow them to meet most of their expenses for all the years that they will be retired.
Generation | Retirement savings behind schedule | Have a formal plan for retirement |
|---|---|---|
Gen Z | 42% | 29% |
Millennials | 57% | 29% |
Gen X | 56% | 30% |
Baby Boomers | 44% | 39% |
One positive finding from the research is that more than 29% of members of all groups said they had a formal plan for retirement. The report found that those participants who had a formal plan for retirement had better outcomes than those participants who lacked one. For example, the report found that 46% of individuals who retired earlier than they planned reported having a financial plan before retiring. For those retiring on time or later, 72% reported having a formal retirement plan.
Key takeaways for plan sponsors
The report recommends that plan sponsors implement certain strategies that will generate what is referred to as “aha moments” to help make the retirement planning process more memorable and helpful. The report’s authors suggest that plan sponsors:
Create an experience: Turn retirement planning into interactive experiences that help participants imagine potential outcomes and that also illustrate the impact that early financial decisions can have. Younger demographic groups are more likely to respond positively to this approach.
Craft targeted, personalized education: Bring members of the same demographic groups together in small meetings. These face-to-face, small group meetings allow participants to engage with peers who encounter the same financial and saving challenges. The report suggests that employees will likely feel more comfortable asking questions in smaller groups and are more likely to engage with content that speaks to the stage in life they are in.
Use video testimonials: The report suggests opening participant meetings with a short video of a participant discussing the financial and planning challenges they faced and the steps that individual took to overcome these challenges. Testimonials such as these can be impactful as they make complex topics such as investing and financial planning more relatable. Participants may be inspired to take action to improve their own financial situation.
Encouraging plan participants to become more actively involved in retirement planning and to take the steps that will move them closer to retirement security is an ongoing process. For input and assistance with your participant messaging and engagement efforts, consult your UBS advisor.
Survey highlights the benefits of consistent participation in 401(k) plans
401(k) plans are a key component of the US retirement system. Retirement advisors have long argued that regular, uninterrupted contributions to an employer-provided retirement plan such as a 401(k) provide participants with an extraordinary opportunity to reach a financially secure retirement. Recent research2 from the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI) supports that argument and illustrates that participants who contribute consistently to their 401(k) plans end up with account balances that are significantly higher than the accounts of the general population of 401(k) participants.
The research
EBRI conducted a longitudinal analysis of the 401(k) plan accounts of 2.7 million participants over a four-year period (2019 to year-end 2023) in a database it maintains with ICI.
The researchers note that a meaningful analysis of the potential for 401(k) participants to accumulate retirement assets must examine the 401(k) accounts of participants who maintained accounts over all of the years being studied. EBRI identified these participants as “consistent participants.” The researchers noted that because of changing samples of providers, plans, and participants, changes in account balances for the entire database are not a reliable measure of how individual participants have fared. A consistent sample is necessary to accurately gauge changes, such as growth in account balances or changes in asset allocations, experienced by individual 401(k) plan participants over time.
The researchers noted that in any given year, the change in a participant’s account balance is due to a combination of three factors:
- New contributions made by the participant, the employer, or both;
- Total investment return on the account balance, which is dependent on market performance and the allocation of assets in an individual’s account; and
- The impact of withdrawals, borrowing, and loan repayment.
The impact on account balances
The research revealed that the average 401(k) account balance for consistent participants rose each year from year-end 2019 through year-end 2023. The exception was 2022, a year that experienced declines in the stock and bond markets.
Overall, the average account balance increased at a compound annual average growth rate of 15.8% from 2019 to 2023, increasing from $82,274 to $148,092 at year-end 2023.
Variations among age groups
The research found that younger participants or those with smaller year-end 2019 balances experienced higher percentage growth in account balances compared with older participants or those with larger year-end 2019 balances. The researchers noted that percentage change in the average 401(k) account balances of participants in their twenties was heavily influenced by the relative size of their contribution and increased at a compound average growth rate of 56.1% per year between year-end 2019 and year-end 2023.
Exposure to equities
Overall, more than two-thirds (70%) of the assets of consistent participants were invested in equities. This group’s equity exposure consisted of equities, the equity portion of target-date funds, the equity portion of non-target-date balanced funds, or company stock. The research noted that younger 401(k) participants are likely to have higher concentrations in equities than older participants.
Moreover, equity exposure among consistent participants remained essentially stable from 2019 through 2023. At year-end 2019, 96.4% of consistent participants held equities, a level that was largely unchanged by year-end 2023.
Target-date funds were a popular option for consistent participants—66.4% of consistent participants held at least some target-date funds in their 401(k) accounts in 2019, and 65.3% held target-date funds at year-end 2023.
Takeaways from the research
The EBRI/ICI research overwhelmingly supports the assertion that 401(k) plan participants who consistently contribute to their employer-provided retirement plans will potentially end up with significant plan account balances over time. In addition, because of their commitment to saving, consistent participants have the potential to attain the goal of retirement security. This is a strong, positive message that plan sponsors can use in their participant outreach and education efforts. It is a message that plan sponsors can direct at those employees who are hesitant about the value of participating in an employer-provided retirement plan or who reduce or stop contributing to their plan whenever they face a shortfall in their finances.
Helping plan participants take the steps that can help them move closer to retirement security is a challenge. For assistance with your participant messaging and engagement efforts, consult your UBS advisor.
2 Holden, Sarah, Steven Bass, and Craig Copeland. “What Does Consistent Participation in 401(k) Plans Generate? Changes in 401(k) Plan Account Balances and Asset Allocations, 2019 – 2023.” ICI Research Perspective, Vol. 31, no. 6, August 2025. www.ici.org/system/files/2025-08/25-per31-06.pdf
.
Best practices for reducing plan loan use
Plan sponsors recognize the value of a plan loan feature in helping drive participation and contribution rates. However, plan loans can be a two-edged sword in that they can complicate plan administration and may impede employees’ efforts toward achieving their long-term retirement goals. Plan sponsors who offer the loan option must walk a fine line between two competing goals—the desire to provide participants with the option of borrowing from their plan for financial emergencies and the need to curb overuse and potential abuse of this option. What follows is a brief overview of the rules regarding plan loans and some best practices that sponsors can employ to reduce plan loan use.
What the tax rules and pension law say about plan loans
Plan sponsors must comply with two sets of rules while maintaining a participant loan program—those under the pension law (ERISA) and those laid out in the Internal Revenue Code. ERISA provides that loans will be exempt from treatment as prohibited transactions if, under the plan, loans are available to all participants on a “reasonably equivalent basis,” are not made available to “highly compensated employees” in amounts greater than to other participants, are adequately secured, are extended at a reasonable rate of interest, and comply with the plan’s terms.
Parallel prohibited transaction provisions are found in the Internal Revenue Code (IRC Section 72(p)(2)). In addition, the rules also provide that, generally, a loan from a qualified plan will not be treated as a taxable distribution if it is required to be repaid within five years (except for certain home loans) and does not exceed the lesser of $50,000 or the greater of (a) half the present value of the employee’s non-forfeitable accrued benefit under the plan, or (b) $10,000. When the employee has more than one loan, the limits are slightly different.
Employers must maintain appropriate administrative procedures
Plan sponsors must ensure that they have appropriate procedures in place to track each participant loan. They must be able to determine the right of the employee to take a loan, have the systems in place to ensure that the employee makes all loan payments in a timely manner, and be able to identify loan defaults promptly. Sponsors should retain the following information for each plan loan:
- Evidence of the loan application, review, and approval process
- An executed plan loan note
- In cases when the loan proceeds are being used to buy or construct a primary residence, documentation that verifies the loan proceeds were used for that specific purpose
- Evidence of loan repayments
- In cases of defaulted loans, evidence of collection activities
Best practices for controlling plan loan use
Sponsors should amend their plans so that:
- There is a limit on the number of loans that plan participants can have outstanding at one time
- There is a waiting period between loans
- Employer contributions to participant accounts are ineligible for loans
- Participants do not have the option of refinancing plan loans
- Loans are restricted for specified purposes only
- Loans are available only to active employees and not to terminated participants or plan beneficiaries
Plan sponsors could also consider increasing the loan origination or processing charge. If fees incurred by the plan to establish and administer loans are reasonable and permitted under the plan document terms, they may be charged to the participant’s account.
Another way that plan sponsors can reduce participant overuse of plan loans is to emphasize that there are very real disadvantages that come with plan loans. Sponsors should use a variety of online tools and education materials to highlight what these potential disadvantages are. Specifically, plan participants should learn that they:
- Are repaying the loan using after-tax money
- Will pay income taxes again on distributions
- May struggle to repay a loan and save for retirement at the same time
- Will have to repay the loan in full if they leave the employer sponsoring the retirement plan
- Will, if the loan is not repaid, have the outstanding balance treated as a taxable withdrawal subject to income tax and a possible 10% tax penalty
The reality is that some employees only participate in their employer-provided retirement plan if they have access to their account assets if and when they need them. While acknowledging that a plan loan option is important to many employees, plan sponsors can take reasonable measures to discourage participants from taking unnecessary plan loans.
For plan sponsor use only—not for participant distribution