Amidst all the discussions and debates about retirement plans and their perceived flaws and failings, we need to remember that one of our assigned roles in working with plans, plan sponsors and plan participants is to ensure they have "sufficient education to allow them to make informed choices." And by "they" we refer to both plan sponsors and plan participants.
What is lost in all the controversy surrounding retirement plans is the fact that a 401(k) plan, a SEP, or any other qualified plan is intended to allow for asset accumulation until and long after we retire and begin enjoying our golden years.
Yet, in a recent study released by the Employee Benefit Research Institute less than 20 percent of those surveyed felt confident they had enough money to live through retirement. And what is even more alarming, as noted in the same study, fewer than half (46 percent) of those surveyed have actually initiated even basic number crunching to calculate how much needs be saved before they retire to maintain any lifestyle throughout their retirement.
Confronted by this daunting data, where can we -- advisors to plans and plan participants alike -- do to help?
For participants: Inform them that retirement will (hopefully) become inevitable and is likely to last almost as long as their working lives. One of my former plan participants, who also happens to be my father-in-law, recently turned 92. He has been retired more than 30 years and recently decided he needed a new car and paid cash for it.
Even before he became my father-in-law, he realized the importance of saving for his retirement. So start saving soon, because it can get expensive. Statistics released by the Department of Health and Human Services indicate that over the course of retirement, retirees will spend an average $200,000 on health care, excluding premiums.
For plan sponsors: The Department of Labor indicates less than 65 percent of those eligible to participate in a qualified retirement plan do so. And one of the contributing factors is the overwhelming number of investment choices that are made available.
In a plan we recently began working with, there were less than 30 participants -- with 60 being eligible -- and 30 investment choices. Statistics compiled by the EBRI suggest for every investment choice above 15, participation drops by 2 percent per choice.
When we took over the plan mentioned above, we decreased the number of investment choices to 15 and participation increased to 90 percent. So, scale back on the number of investment options while choosing to focus your educational efforts on quality as opposed to quantity. A plan with limited investment options is generally less expensive to operate as well.
Automatic enrollment should also be a topic of conversation with a plan sponsor, especially if there is a chasm between eligible and actual plan participants. A survey recently conducted by the Department of Labor revealed only 12 percent of participants who were automatically enrolled in their plan opted to un-enroll.
These are just a few strategies we can trigger to increase the retirement savings and participation rates for our plans and plan sponsors. If you would like to share some of your ideas, please let me know.
