US Raises Remain Modest, but Employers Investing More in Retirement Plans

US Raises Remain Modest, but Employers Investing More in Retirement Plans

Lackluster wage growth remains a weak point in an otherwise strong US economy. Pointing to the latest salary budget survey from WorldatWork, Stephen Miller at SHRM notes that US employers’ budgets for salary increases are expected to grow by about 3 percent on average in 2018, “essentially unchanged from 2017”:

WorldatWork’s findings are in line with other 2018 salary projections. For example, 2018 pay projections were reported last May in Planning Global Compensation Budgets for 2018 by ERI Economic Research Institute, a compensation analytics firm in Irvine, Calif. The firm’s forecast, based on data from over 20,000 companies in its research database and analysis of government statistics, projected that U.S. salary increase budgets will grow by 3.2 percent in 2018, up from a 3.1 percent increase in 2017 and 3.0 percent in 2016.

In fact, salary increases have averaged around 3 percent a year over the past five years, amid low inflation and a reluctance on the part of companies to pass on the cost of higher pay to consumers. At the same time, many companies are rethinking the blanket annual raise as a rewards strategy, preferring to rely more on bonuses, targeted raises, and other incentives to reward high performers.

There is, however one area in which US businesses’ investment in their employees is increasing: namely, retirement savings. Martha White at NBC News highlights new data from Vanguard showing that employers are contributing considerably more to their employees’ 401(k) plans than they were just a few years ago, with the average contribution last year standing at 4.7 percent of employee pay, up nearly a full percentage point from 2015:

“Three things are leading to this,” said Jean Young, senior research analyst at the Vanguard Center for Investor Research. More companies today have introduced retirement plans with automatic enrollment at a default of 4 to 6 percent. “The most common default 10 years ago was 3 percent,” Young said. When employers realized that many workers just choose the default contribution, they began increasing those percentages.

Safe-harbor provisions designed to make sure that 401(k) plans benefit lower-paid workers as well as executives are another contributing factor in the growth of employer contributions, Young said, along with the growth of spread-out or tiered matching policies that require greater employee contributions.

We’ve looked before at how automatic enrollment “nudges” employees to save more for retirement by making 401(k) contributions the default action. However, some observers, including some of the original proponents of the 401(k) plan, now have doubts about whether these savings vehicles are enough to provide a financially secure retirement for American workers, even as employee contributions have also been on the rise.

If retirement is not feasible or attractive for many employees, this is a problem not only for them but also for their employers. While people are living longer lives and is becoming more common for employees to work into their 70s, elderly employees can become less productive or engaged, especially if they would prefer to retire but are unable to do so. They also have higher health care costs. Furthermore, as our own Brian Kropp explains to White, employees who can’t afford to retire clutter the senior ranks of an organization and make it harder to promote and develop their younger colleagues:

“It creates another problem when employees don’t leave. That next generation that’s ready to move up, there’s fewer opportunities for them,” said Brian Kropp, practice leader at consulting firm CEB, now part of Gartner. “They aren’t retiring and creating the space for the next generation.”