Plan Sponsors Can Correct Gender-Based Retirement Income Gap

Lower retirement account balances, coupled with lower average Social Security benefits and longer life expectancies, mean that women are projected to have much lower income to sustain them throughout retirement than men, according to new research from Prudential.

The analysis frankly lays out the challenges that women in the U.S. face when planning for retirement: Longer life expectancies; the likelihood that many will be single at some point during retirement; time constraints due to roles as workers (both paid and unpaid) and caretakers; lower earnings than men; greater debt at both Millennial and pre-retirement ages than prior generations.

“Women have made significant advances over the last few decades in the workplace,” Prudential explains. “They currently comprise 47% of the U.S. workforce, and 40% of working women are in managerial and professional jobs, compared to just 18% in 1975. Despite these workplace advances, women continue to face a much greater challenge than men when it comes to retiring with lifetime financial security.”

The Prudential data shows fully 25% of women indicate that they don’t think they’ll ever be able to retire, compared to 14% of men. Experts warn that working well beyond the traditional retirement age is generally far less feasible than people anticipate.

When a significant percentage of the workforce isn’t retiring at an expected age, employees’ productivity and organizations’ ability to attract, promote, and retain new talent may be adversely impacted, Prudential warns. The analysis shows a one-year increase in the average retirement age for a given workforce results in an average annual incremental run rate of about 1% to 1.5% of workforce costs.

“This is about half the average annual employer cost of running a defined contribution plan,” researchers note.

Prudential argues that plan sponsors “increasingly have the ability to leverage data to determine when participants are facing important milestones in their lives. The ability to use data to fuel proactive engagement regarding key savings and planning opportunities can also help make closing the gap an achievable reality.”

NEXT: Minding the gap

Many of the data points shared by Prudential about this topic can help plan sponsors make practical adjustments to their plan designs. For example, the firm finds marriage patterns have changed over the last few decades, while divorce has become more prevalent. At the same time, more women are choosing to remain single. The result is that, when women reach retirement age, they are actually much less likely than men to be married. For those 65 and older, Prudential finds, 70% of men are married, compared to just 45% of women.

“This is an important consideration, as marital status is strongly linked to many aspects of financial security,” Prudential warns. “Divorced and single women are unable to capitalize on the resource pooling and economies of scale that come with a marriage or partnership. Widowhood also causes financial security challenges, as household income often drops more significantly than household expenses when a spouse dies.”

For plan sponsors, one clear indication of all this is that women (and men who are married, it should be said) should be urged to save even more for retirement than might otherwise be suggested. Plans also must be aware that the average woman working full-time earns 79% of the income earned by her male counterpart working full-time. This gap also holds true for lifetime earnings, “and is exacerbated when a woman steps out of the workforce or reduces her work schedule to prioritize caretaking duties.”

“Since Social Security benefits are based on career earnings, women’s Social Security benefits also tend to be lower,” Prudential warns. “Further, when women take time out of the workforce, they limit their opportunity to invest in their workplace retirement plan.”

Prudential suggests that plan design solutions like auto-enrollment and automatic deferral escalation can help women overcome these challenges. The firm also urges sponsors to offer more in-plan lifetime income opportunities that allow investors to hedge against longevity risk. 

“Make support resources relevant and accessible. A benefit of providing financial wellness education at the worksite is that it may be the most effective way to reach women, who are often time-starved and unable to dedicate personal time to their finances,” researchers conclude. “Female workers tend to be advice-seekers and often seek collaboration before making a decision. Worksite-based counseling, which may occur in-person, telephone, or video chat, can help.”

The full research paper is available for download here.