Among the concerns we all share is whether we will have saved enough for our retirement. And, the most common way of saving for retirement would seem to be through an employer-sponsored 401(k) plan.
Yet, statistics provided by both the Department of Labor and the Employee Benefit Research Institute indicate only 73 percent of eligible employees actually participate in any defined contribution plan available to them, which raises some concerns. Or at least it should.
The question becomes: Why only 73 percent?
One of the answers might be attributable to the number of investment choices offered to prospective plan participants averages between 18 and 27 choices. Imagine, if you will, being confronted on your first day of eligibility, with:
- Eighteen to 27 prospectuses;
- Eighteen to 27 fund fact sheets;
- And an application to complete in the next 20 minutes.
One other related cause for the discrepancy between those employees eligible to participate and those who actually participate can be traced to another survey conducted by the Employee Benefit Research Institute. According to their data, for every investment option in excess of 15, eligible employee participation drops by 2 percent; so maybe fewer choices would lead to more participation in the plan. And more savings for, and at, retirement.
In following these statistics, we limit investment choices within the defined contribution plans we operate to between 12 and 15 choices, which results in an average participation rate for our plans approaching 95 percent.
Are there any other reasons for the lack of participation?
A few, as in the absence of participant education. The Department of Labor mandates, in Section 404, that participants must receive "sufficient education to allow them to make informed choices" pertaining to their retirement plan investment choices. You, as the financial advisor to the plan, are required to provide this education.
And, with the passage of the Pension Protection Act of 2006, you as the financial advisor to the plan, are empowered to offer specific advice to plan participants regarding their investment choices.
So, rather than hold annual enrollment education meetings, quarterly meetings have, with our clients, proven more effective in boosting both participation and deferral levels.
One more way to increase participation and decrease the number of investment options, which also serves to increase participation would be to offer a series of pre-set portfolios within the plan lineup.
These series of portfolios, occasionally referred to as target-date funds, range from the conservative (primarily fixed income) to moderate (equity and fixed income) to the aggressive (almost all equity). Additionally, some of the 'guess-work' about when to rebalance is removed, as each of these series of portfolios can automatically be rebalanced on either a quarterly or annual basis.
One additional concept to consider when strategizing about how to increase participation within your retirement plans and becoming better known to your plan participants: A recent survey by AARP indicated sixty percent of retirees over age 65 still have their 401(k) with their last employer. Maybe by increasing participation in your plans you could reduce that number of orphans considerably.
Colin Smith can be reached via e-mail at rr1058@aol.com.
