More retirement savings options might lead to fatter retirement savings, a recent study found.
Employee stock purchase plans are among the retirement benefits companies can offer, but some employers worry if they added this option — as well a 401(k) plan — their workers would contribute less to their portfolios, according to a Fidelity Investments analysis of 200,000 employees of 100 clients. In fact, the opposite was true — 90% of people who were in ESPPs also contributed to their employer-sponsored retirement accounts, and those in both plans tend to stash more money (about 32% more, on average) in their 401(k) plans.
ESPPs allow employees to purchase company stock at a discount using after-tax dollars. The proceeds after selling the stock can be used for anything. The discount is usually 15%, but employers may also incorporate a “lookback,” where they take a lower price at the beginning or end of the accumulation period and apply the discount to the lower price.
Along with contributing more to their 401(k) plans, employees who participate in their company’s ESPP also save an additional 6.3% of salary in those accounts, the study found. These trends were similar for both higher-earners and their lower-earning counterparts, though lowest income workers were less likely to participate unless there was a 15% discount with a lookback.
Americans need all the help they can get when it comes to retirement savings. So many people are underprepared for their retirements, and some don’t realize it until they’re closer to leaving the workforce. The retirement savings gap — which is what people have versus should have — was $28 trillion in the U.S. in 2015, but is expected to be $137 trillion by 2050, according to the World Economic Forum.
There are alternatives, for those who are saving in a 401(k), don’t have access to an ESPP but want to put more away for their futures. Some workers may be able to participate in a Health Savings Account, if they have a high-deductible health insurance plan, which would allow them to save money for future health care expenses in a tax-efficient manner. There are also individual retirement accounts, either as a traditional or Roth option, for people who may or may not have an employer-sponsored plan.
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