As an employer, you may feel that having a 401k plan in place is sufficient. But have you ever considered your 401k plan goals?
Generally speaking, if 401k plans are meant to be used to augment retirement income they may be considered a success. However, if 401k’s are expected to serve as the primary source of retirement income (along with Social Security), success is proving to be elusive for most participants.
The realities of this conclusion have been evidenced in various studies and analyses. Conclusions drawn from this investigation are leading to more candid conversations regarding potential solutions for dealing with participants’ retirement readiness.
Although HR departments are stretched to the limit nowadays, establishing 401k plan goals is critical to building a successful retirement plan. And a successful retirement plan is a very compelling employee benefit.
Three Essentials to Establishing 401k Plan Goals
Let’s start with the three cornerstones of a successful 401k plan:
- Participation Levels. What proportion of employees are participating?
- Average Deferral Rates. What percentage of income are participants choosing to defer?
- Asset Allocation. What do participants invested in?
These three essential elements are important because low participation and/or deferral rates can be an indicator that employees don’t value the 401k plan or have some impediment which keeps them from participating more fully. No one can reach retirement-readiness without saving aggressively.
In addition, low participation and deferral rates mean that highly-compensated employees can face limitations on how much they can defer into the plan. So, smart plan sponsors measure these important 401k plan goals and track their progress over time..
Participation will always be a key issue. You have to first get employees to join the plan before they can enjoy the benefits. Participation rates vary by plan size, but did you know that according to the PSCA’s 48th Annual Survey of Profit Sharing and 401k Plans, the average is over 77%! How does that compare to your plan? Participation can improve from a variety of actions including plan design changes and focused education efforts.
Average Deferral Rates
Average deferral rates are another important gauge of the success of your retirement plan. Are your participants taking advantage of any employer matching contributions? Are you faced with refunds each year to your highly-compensated employees due to low average deferral rates on the non-highly compensated employees? According to the PSCA’s 48th Annual Survey, the average pre-tax deferral rate:
- 5.4% deferral rate for non-highly compensated employees
- 6.7% deferral rate for highly compensated employees
Keep in mind most financial planners advise people to save at least 10% of their income for retirement. Clearly, we have to do a better job encouraging participants to save!
Finally asset allocation is a crucial element for participants looking to build their retirement nest eggs. However, the typical mutual fund investor underperforms the market average by a large margin.
The average annual returns for an equity mutual fund investor were 3.83% vs. an average annual return of 9.14% for the S&P 500. ( 20 years ending 12/31/2010, Dalbar, Inc. Quantitative Analysis of Investor Behavior)
Why does this happen? Investors continue to react to market movements and the news. One of the most startling facts of the Dalbar study is that at no point in time have average investors remained invested for sufficiently long enough periods to derive the benefits of a long-term investment strategy. The good news is that investors in asset allocation funds, such are target date options, remain invested for longer periods of time than any other investment type.
Improvements in asset allocation, like most other aspects, can come from a variety of sources including education, the use of Managed Portfolios as well as offering investment advice to employees. As 401k advisors, we are qualified to help participants develop an appropriate retirement strategy.
401k Plan Goals Are Critical To Achieving Retirement Readiness
A recent Employee Benefit Research Institute study focuses on retirement readiness for Baby Boomers and Gen Xers. The conclusions are not encouraging. One takeaway is even if these groups delayed retirement past age 65 they would still have insufficient income to cover their basic retirement expenses (even if they delayed retirement into their 70s). Moreover, even assuming members of these groups intend to delay retirement significantly, the study indicated that factors like layoffs, mergers, and poor health may prohibit employees from working past age 65.
Over the 25+ years since the inception of 401k plans, retirement plan design has improved, technology has improved, investment options have improved, and service providers have grown and improved.
The only aspect of the 401k plan has not shown substantive improvement over the years is the participant . . . the ultimate consumer for whom the 401k plan was developed!
Multiple credible industry studies indicate that, left to their own devices, today’s participants are making all the same retirement planning and investment mistakes they were making 25 years ago.
With the effective demise of defined benefit plans, much of the attendant costs, administrative complexities, regulatory, and investment and funding responsibilities have been removed from the employer’s shoulders and essentially shifted to the participant. Now it is the less sophisticated participant who is expected to know how to “do the right thing” for their retirement. Unfortunately, to date all evidence indicates that this is not happening.
Are 401k Plan Goals Really an Employer Responsibility?
Some employers do not believe it is their responsibility to ensure their employees’ well-being in retirement. Many adopt the philosophy that “we provide the 401k plan, and [in most cases] a matching contribution, and we provide for plan management and incur fiduciary responsibilities….isn’t that sufficient?”
However, a significant number of plan sponsors are concerned about their employees’ retirement readiness. These are the sponsors who are interested in considering ways to improve the successful outcomes of their plans.
Some of the potential solutions require a commitment of time, effort, and additional cost. But few (if any) of the solutions require costs equivalent to those incurred if employers still offered defined benefit plans. In other words, an employer need not incur all the time, effort, cost, and complexity of a defined benefit plan, but neither need they offer a less-than-impactful 401k plan. For sponsors desiring more inspired outcomes, solutions exist within the 401k and 403b world.
Finding Unique Solutions With 401k Plan Goals
As members of the Retirement Plan Advisory Group, we are available to assist plan sponsors in exploring all areas of plan analysis. From design considerations through implementation of personalized Participant Retirement Readiness solutions, we look forward to discussing options that create successful outcomes for you and your participants.
While the retirement challenges are significant, they can be overcome by establishing and measuring 401k plan goals. Remember, your retirement plan can be a powerful recruiting tool and it’s the one benefit that your employees will utilize throughout their lifetime. Please contact us for a free 401k plan goals worksheet appropriate for plan sponsors.Related Topics
- 401k goals