The perfect 401(k) may seem like an elusive retirement vehicle, but Catherine Collinson, president of Transamerica Center for Retirement Studies, believes six steps would lead to just that.
Collinson defines the perfect 401(k) as one that “helps ensure that workers are participating, contributing and managing investments wisely in order to adequately fund their future retirement and that workers have a strategy for saving, investing and transitioning into retirement.”
According to her white paper, “The Perfect 401(k),” Collinson lists the key ingredients of a perfect 401(k):
- Maximizes employee participation and contribution rates
- Provides and promotes incentives to save (e.g., employer match, tax incentives)
- Educates and empowers employees to make informed decisions about retirement saving, planning and investing
- Underscores the need for workers to have a retirement strategy
- Maximizes plan effectiveness (including investments, education, customer service) and participant satisfaction
- Serves as a highly effective tool for employers to attract and retain employees
Collinson came up with the idea of the perfect 401(k) because there are so many different aspects to them and “how you prepare workers for retirement seems more daunting than ever.”
The purpose of this white paper was to “take a step back, look at what we know about 401(k) plans, worker and employer trends and take a shot at a definition of what makes a perfect 401(k) plan,” she said.
“The good news for plan sponsors is that many of these plan enhancements can be implemented within the context of their existing 401(k) plan infrastructure and do not necessarily need to be costly or require a major investment of human or monetary resources,” the report said.
Are People Saving Enough for Retirement?
The 12th Annual Transamerica Retirement Survey found that while 53 percent of workers expect the majority of their retirement income to come from 401(k), 403(b) and IRA accounts, 52 percent don’t believe they are saving enough to retire.
Transamerica asked respondents what age they started saving for retirement, how much they were making annually and contributing to their retirement and placed the information into a model. The report used for its example a single, 28-year-old man, making $50,000 a year and contributing 6 percent of his annual pay into a retirement account. The model took into account annual salary increases of 3 percent, an annual inflation rate of 3 percent, a company match of 3 percent, an investment growth rate of 6 percent (pre-retirement) and an investment growth rate of 3 percent after retirement. If the individual retires at age 65 and lives to age 90, his estimated retirement goal would be $970,874.
If he made $426,117 from Social Security and $283,941 in his 401(k), this worker would have a projected retirement shortfall of $260,816, according to the report.
“Our model is based on no gaps in employment, no breaks in savings, no early distributions, no hardship withdrawals or cashing out of accounts when you change jobs,” Collinson said. All of these things can factor into how much a person saves for retirement.
Workers may overcome this shortfall by working longer or saving more, but according to the survey, 47 percent of workers “guessed” at the amount of savings they will need for retirement. Another 26 percent estimated the amount based on current living expenses and only 11 percent used either a worksheet or calculation to determine their retirement savings needs.
“Workers need specific, personalized tools to determine their savings needs that are easy to access, easy to understand and allow real-time modeling of various saving scenarios,” the report said.
To help workers save more for retirement, plan sponsors could prompt workers to calculate their retirement needs. Retirement plan providers could enhance their websites to present participants’ retirement forecast when they log on and allow workers to make changes to their plans to tweak the forecast. They also could provide retirement income projections on 401(k) account statements.
Education & Empowerment
To devise better retirement strategies for individuals, the perfect 401(k) needs to better educate and empower employees to make informed decisions about their retirement saving, planning and investing.
The Transamerica survey found that most workers prefer to make decisions regarding their retirement savings and most seek advice on how best to do that. Two-thirds of workers said they don’t know as much as they should know about retirement investing.
The survey asked respondents what would motivate them to learn more about retirement saving and investing. The top three responses were: tax breaks and other savings incentives, easy-to-understand educational materials and an easy-to-understand starting point.
“Financial advisers and benefits advisers just need to be easier to understand. Materials need to be easier to understand. We see this in our research and survey data over and over again,” Collinson said.
When workers first are learning about and signing up for their benefits at a job, they are coming in with very different educational backgrounds, she said. People who are college-educated have an easier time understanding the materials than someone with a high school education.
Employers and retirement plan providers need to do a “sanity check” and make sure they are “reaching the broadest audience,” she said.
“If we can help get the word out, especially for educated people, we see a very high response rate. They are dialed into retirement,” she said. “For people who are not tuned in, we have got to find a way to meet them on their on (turf).
“We find that men are more tuned into retirement issues than women. One of our goals is to get retirement-related information into publications women read. Instead of asking them to come to us, we deliver the message where the audience is listening or paying attention,” Collinson said.
There is a huge difference between the perception of plan sponsors and what workers believe when it comes to participant satisfaction, the survey found. “Plan sponsors tend to overestimate worker satisfaction with the overall plan, the quality of the investment menu and the availability of the ‘right’ information to make decisions about the plan,” the report found. They also “underestimate their employees’ desire to receive more information and advice on how to achieve their retirement goals.”
When asked if they were satisfied with their retirement plan, only 78 percent of workers said they strongly agreed or somewhat agreed with that statement, compared to 95 percent of employers who felt their workers were satisfied with their plans.
The report found that “more communication is needed between employers and workers on retirement plan issues.”
It recommended that plan sponsors and retirement plan providers “create an ongoing dialogue with workers regarding their retirement benefits.” It also suggested they conduct a survey of eligible employees to find out how satisfied they are with the plan, its investments, education and disclosures to identify strengths and areas for improvement.
One area that can improve worker happiness with a retirement plan is to offer additional plan features, like a Roth 401(k).
“Anyone with retirement plan experience knows that the ‘perfect’ 401(k) may not be attainable in an absolute sense. But in a very real sense, the ‘perfect’ 401(k) is achievable through a combination of plan features, effective employee education, and ongoing employer/employee communication that focuses on six key ingredients that characterize the perfect plan and results in increased participant savings rates, education and empowerment, and plan satisfaction,” the report concluded.