Monday, October 8, 2012

401(k)s Aren't Used Appropriately by Most Employees ... Whose fault is That? ... Better yet, What Do We Do About It?

401(k) plans are not being used properly by the vast majority of employee plan participants, according to a recent survey of employers.

Employers: Workers don't make good use of 401(k)s says this:

"Encore: Most workers aren’t making good use of their retirement plans, but employers say the plans aren’t the problem.

Is a 401(k) retirement plan “adequate” if most workers who use it aren’t prepared for retirement?

That’s the question raised by a new study from benefits consulting firm Towers Watson . The 401(k) system has come under a lot of criticism since the financial crisis hammered workers’ nest eggs. But the study, which polled about 370 large employers, suggests there may be a big gap between how managers and workers view the issue — and that managers don’t necessarily have a high opinion of the hoi polloi.

 The discrepancy: Towers found about two thirds — 65% — of employers believed employees had ‘adequate’ retirement and investment planning resources. At the same time only 15% thought employees “made good use” of the resources and only 22% thought employees made “informed decisions” about retirement.


Of course, someone with a more charitable view of the employees might wish employers were asked a follow-up question: If your plan is such a failure for the people it’s supposed to help, what’s exactly is the standard you’re using to declare it “adequate”?

There have been a slew of proposals about what to do to make 401(k)s better. Alicia Munnell, director of the Center for Retirement Research at Boston College, advanced some proposals of her own in a recent Encore post. Her suggestions included turning automatic enrollment and automatic escalation in the contribution rate into mandatory default settings for employees, and requiring that more default 401(k) investments be cheaper options, like indexed ETFs or indexed mutual funds. For more, see Munnell’s post “ How 401(k)s Could Work Much Better .”

And here's a short sample of the immediately above referenced article "How 401(k)s Could Work Much Better:"

". . . the problem is not that the U.S. ended up with defined contribution plans in the private sector but rather that 401(k)s are the most extreme individualistic form of a defined contribution plan. 

People have to decide whether to join the plan, how much to contribute, how to invest those contributions, whether to roll over accumulations when they shift jobs, how much to invest in company stock and how to withdraw money at retirement. People make serious mistakes at each step, producing low coverage rates and small balances. . . .

The median balances for households approaching retirement (age 55-64) are only $120,000 — $575 per month if the household purchases a joint-and-survivor annuity. . . .

The question is what to do with a large defined contribution system that is falling far short of its potential. The obvious answer is “fix it.”. . .

In the longer run, my view is that an ideal defined contribution system should have extensive risk sharing, similar to that in the Dutch collective defined benefit plans. Instead of each employee having his own account, assets would be pooled so individuals would be freed from the burden of selecting their portfolios. Benefits would be paid as an inflation-adjusted stream of lifetime payments. If the plan suffers losses, adjustments could be made by an increase in employee contributions, a reduction in cost-of-living adjustments, and/or lower benefit accruals for current workers. Similarly, if returns come in better than expected, participants would share the bounty."

Summing Up

401(k) plans are excellent vehicles to enable us to save for retirement and end up with assets sufficient to carry us comfortably through the rest of our lives. 

Of course, we need to start saving early, keep saving throughout our careers, set aside sufficient savings each year while doing so (not less than 10% annually), and invest in "risk" assets which will enhance our inflation adjusted purchasing power over time.

That means stocks for the long haul.

That in effect involves investing in America's future and our unique brand of an ownership society in a free market system.

 Thanks. Bob.

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