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Plan Sponsors: How to Build a Better 401(k)
The bad news is, 401(k) plans are still not fulfilling their full potential. In the upcoming book, Falling Short: The Coming Retirement Crisis and What to Do About It, written by Charles Ellis (author of the well-known Winning the Loser's Game), and Boston College's Center for Retirement Research director Alicia Munnell and Associate Director Andrew Eschtruth, are ringing the alarm bells: If present trends continue, today's crop of workers are not going to have anywhere near the same retirement security their parents and grandparents enjoyed.
The good news is, however, there are some things employers and 401(k) plan sponsors can do to make things better for their own workers. The 15th Annual Transamerica Retirement Survey spells out a number of specific steps that employers can take immediately that may substantially improve the retirement prospects and well-being of their employees.
Make enrollment automatic. Force employees to opt out. "Automatic 401Ks still allow an individual the opportunity to say, 'No, I really didn't want to be in the plan,' but this approach is a proven success at improving participation rates," says Boston College's Andrew Eschtruth. "This should be coupled with 'auto-escalation,' argues Eschtruth, "which automatically increases the amount you save in your 401K each year for a certain period, so you're putting away a higher percentage of salary. The escalation might happen around the time when your annual raise or cost of living adjustment kicks in. Again, this feature is something the individual could opt out of, but it would point them toward higher saving levels."
Currently, Transamerica's research indicates that among plans that already incorporate autoenrollment, the average 401(k) contribution rate is about 3 percent of compensation - still not adequate to support a reasonable retirement lifestyle, given projected rates of return. But Transamerica also found that employees would be receptive to automatic enrollment in these plans up to contribution levels of about 7 percent of compensation.
Include part-time workers. Too often, part-time workers are excluded from the retirement savings mechanisms that the rest of us enjoy. Only 49 percent of plan sponsors surveyed extend 401(k) benefits to part-time workers, resulting in a massive undercoverage problem. If these workers are not saving now, the long-term societal impact will be significant when these workers reach retirement age.
Include designated Roth accounts. Roth IRAs are popular because they allow workers to pay relatively modest tax rates on their incomes early in their careers in exchange for unlimited tax-free growth. This makes them a compelling option for younger workers, especially, because their marginal income tax rates tend to be low before they reach their peak earning years and because they have many years of potential investment growth ahead of them before they will begin taking retirement distributions. Furthermore, Roth accounts aren't subject to required minimum distribution rules.
Include 'target-date funds,' asset allocation and managed accounts. Studies routinely show that individual investors, unguided by professional advisors, routinely underperform the market. They tend to buy and sell at the wrong times, leading to substantially reduced investment returns. Plan sponsors can mitigate this by offering "target date" funds, asset allocation funds, professionally managed accounts and other similar offerings to their 401(k) plans.A
Speak with your employee benefits plan representative for specific information on what programs are available for your plan.
If you have questions or concerns on this issue, do not hesitate to call Zeiler Insurance and speak to one of our customer service representatives. As an independent agency, Zeiler Insurance prides itself with quality customer services for the people of the Chicago-land area and the rest of the Midwest. Customer or not, we can review your insurance and see if you are being protected appropriately for the right price.
-Lucas Zeiler
(708) 597-5900 X651