Fees might get all the headlines, but a recent survey ranks themlast when it comes to lack of retirement readiness. “401(K)/IRAHoldings in 2013: An Update from the SCF,” by Alicia Munnell, thedirector of the Center for Retirement Research at Boston College,cites government data that identifies three factors more costlythan fees.

|

The report focuses on what it calls the “missing $273,000.” Thisrepresents the difference between what we should expect the average401(k) account balance to be and what it really is. Munnell brokedown the difference into four distinct components. While she doesmaintain “plan sponsors clearly have room for improvement in thearea of fees,” the data shows fees, based on the average mutualfund expense ratio, accounts for only $59,000 of the missing$273,000. Mind you, no one expects to get something for nothing, sosome amount of fees must exist. More importantly, for all the badpress (much of it well deserved), three elements—allunnecessary—produce significantly more damage to retirementreadiness than fees.

|

What Munnell calls “immature system” accounts for $65,000 of themissing $273,000. This phrase can best be described as people notbeginning to save at an early age. The “immature” part presumablyrefers to the early years of the 401(k) vehicle. Employees werejust getting their feet wet with the 401(k) concept and might havedelayed participating as a result.

|

“Intermittent contributions” make up $71,000 of the missing$273,000. We shouldn't point to a lack of disciplined savings asthe sole reason for employees taking breaks in contributing to theplan or in reducing their annual contribution. These gaps andreductions can naturally occur as a result of job changes andunexpected expenses. One of the major culprits in causing this gap,as well as delaying initial participation, is the typical one-yearwaiting period for eligibility.

|

By far, “leakage” is the most critical detriment to retirementreadiness. It eats up an alarming $78,000—that's almost 30percent—of the missing $273,000. Leakage refers to loans, hardshipallowances, and early withdrawals. While, unlike fees, leakage isnot necessarily a given, it remains difficult to prevent them.Clearly, plans can be designed to prohibit loans and withdrawals,but this might discourage saving.

|

This does, however, give us a clue on how to begin to mitigatethese factors. It all comes down to improving plan design. Plansponsors and service providers need to take a serious look at howthe plan document addresses: 1) the employee's eligibilityrequirements; 2) the company's matching strategy; 3) loanprovisions; and, 4) the permissibility of hardship and earlywithdrawals.

|

And what about investments? You might be interested to know thatMunnell was one of the authors of a 2012 Wharton study thatrevealed investment strategy may be less important than investmentadvisors might be willing to admit. It turns out, the differencebetween the average investment allocation and the optimal assetallocation can be made up for simply by working four moremonths.

Complete your profile to continue reading and get FREE access to BenefitsPRO, part of your ALM digital membership.

  • Critical BenefitsPRO information including cutting edge post-reform success strategies, access to educational webcasts and videos, resources from industry leaders, and informative Newsletters.
  • Exclusive discounts on ALM, BenefitsPRO magazine and BenefitsPRO.com events
  • Access to other award-winning ALM websites including ThinkAdvisor.com and Law.com
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.