Such is the conundrum of the 401(k). Your retirement planning tool is showing signs of increased balances even as some of the experiments to get people to invest more - via auto-enrollment - is as Aon Hewitt suggests, somewhat sub-optimal.
Auto-enrollment was supposed to get all boats to rise. New workers who knew little about this sort of plan to help them save for retirement were automatically enrolled in their new employer's defined contribution plan. But these new investors did not respond as the industry thought they would. Pamela Hess, director of retirement research at Aon Hewitt suggested in a January 26th press release from the company: "Auto-enrollment is a relatively simple and effective way for companies to help workers plan for retirement—especially younger workers who may not feel the immediate pressure to save for retirement." And yet, once in the plan, these new workers, often referred to as the Gen Y investor, failed to follow through on the effort with interest of their own.
Companies are still trying
It is not as if the companies aren't trying. Designed to simplify the investment decision process, more than half of the companies surveyed attempted to educate these new workers, appealing to this younger investor with the offer of online investment guidance coupled with online investment advice and managed accounts. Compared to 2010, when just 28 percent of employers offered managed accounts, this is a noticeable increase in what is often considered the most basic of fiduciary responsibilities.
Plan sponsors are undaunted by the lackluster use of these plans and continue to offer additional levels of services which include investment modeling and even attempts at profiling how what you have accumulated will be spent down once their employees do retire. Younger employees seem to accept the target date fund, the primary choice for the auto-enrollment effort despite the questions surrounding the viability and transparency of these funds.
Reinstating the matching contribution has helped some of these plans. By the end of 2010, in the wake of the Great Recession, 23% of the companies had stopped or lowered the amount of money the plans contributed. Over half have decided to add these matching contributions back to the plan in 2011 with about 18% of the 23% who stopped toying with the idea of bringing the matching contribution back.
Other incentives to get these workers to contribute more to their 401(k) plans are not so much incentives as elimination of other benefits that future retirees once banked on for their retirement. Fewer companies offer medical benefits to their employees and some have even raised the current cost of health insurance to employees to offset the cost of helping with retirement, a trade-off that seems counterproductive. Others have simply frozen their pension plans pushing workers to seek the alternative self-directed method of ensuring a secure retirement.
Some of these moves have actually forced the employee to invest more and the latest numbers published by Fidelity point to an increase in the average balance in these plans. yet the average balances, now estimated at the 2010 year end were still far below where they actually needed to be. If you had invested steadily over the last decade, your balance, according to Fidelity is around $180,000. If you are within fifteen years of retirement, you are still hundreds of thousands of dollars away from what is often considered the optimal balance.
The 14, 16, 18 Rule
For most investors - I prefer this term to overused "saving for retirement" - the accumulated balance in these plans should equal 14 times your last year's salary. Aon Hewitt points to a need for 16% of the salary of the 31 to 45 year old group as the goal, which includes the total amount of available benefits such as Social Security and any pension plans they might have. Because the youngest workers can count less on these additional sources of income for retirement, they will need 18% of their salary to make retirement comfortable.
If plan participants at Fidelity are any indication, these plans are moving in the right direction. Over a million people involved with the Fidelity offerings have accessed their online tools or simply called for advice. According to Beth McHugh, vice president of market insights at Fidelity, the answer to how much you will need still depends on the worker taking control of the plans. She suggests "At the end of the day saving at appropriate levels, saving continuously and ensuring that you have the appropriate asset allocation are the most critical components to help ensure that you have sufficient savings for retirement."
But contribution levels still remain lower than they should be. The average participant has increased their contribution, but from a paltry 4% to a better 7%. Yet this increase is still far from what the investment and retirement community would like to see workers contribute. Add to that the lack of portfolio diversification once they are in the plan, little effort by the participants to rebalance on a regular basis and for older workers, adequately defining the risks they are taking with those investments all increase the chances that these plans are not doing as well as they could.
Some of the uncertainty of retirement needs may be the problem. Not knowing the impact of taxes (although there has been an increase in the amount of Roth 401(k) options in many plans) and the negative effect of inflation. workers are underestimating what they might need and if they are making educated guesses on that number, taking too many risks too close to retirement to try an offset those issues.
The Selfish Approach
Perhaps the worker should instead frame the plan in a more realistic way. Most advice offered on how these plans should be spent down once you retire involve a suggestion that returns on the plan in a post-employment environment should be all that the retiree tap. This avoidance of using capital - in other words protecting the balance in the plan at all costs, may have created a greater worker angst than is needed.
Focusing on preserving wealth as an heirloom is not how these plans should be calculated. In a era of less, the retirement planning employee should be focusing on what they will need first and not so much on what they might leave to their heirs. While prudent lifestyles are still a great help - both prior to and after they retire - being selfish in your projections is not necessarily a bad thing.
Auto-enrollment was supposed to get all boats to rise. New workers who knew little about this sort of plan to help them save for retirement were automatically enrolled in their new employer's defined contribution plan. But these new investors did not respond as the industry thought they would. Pamela Hess, director of retirement research at Aon Hewitt suggested in a January 26th press release from the company: "Auto-enrollment is a relatively simple and effective way for companies to help workers plan for retirement—especially younger workers who may not feel the immediate pressure to save for retirement." And yet, once in the plan, these new workers, often referred to as the Gen Y investor, failed to follow through on the effort with interest of their own.
Companies are still trying
It is not as if the companies aren't trying. Designed to simplify the investment decision process, more than half of the companies surveyed attempted to educate these new workers, appealing to this younger investor with the offer of online investment guidance coupled with online investment advice and managed accounts. Compared to 2010, when just 28 percent of employers offered managed accounts, this is a noticeable increase in what is often considered the most basic of fiduciary responsibilities.Plan sponsors are undaunted by the lackluster use of these plans and continue to offer additional levels of services which include investment modeling and even attempts at profiling how what you have accumulated will be spent down once their employees do retire. Younger employees seem to accept the target date fund, the primary choice for the auto-enrollment effort despite the questions surrounding the viability and transparency of these funds.
Reinstating the matching contribution has helped some of these plans. By the end of 2010, in the wake of the Great Recession, 23% of the companies had stopped or lowered the amount of money the plans contributed. Over half have decided to add these matching contributions back to the plan in 2011 with about 18% of the 23% who stopped toying with the idea of bringing the matching contribution back.
Other incentives to get these workers to contribute more to their 401(k) plans are not so much incentives as elimination of other benefits that future retirees once banked on for their retirement. Fewer companies offer medical benefits to their employees and some have even raised the current cost of health insurance to employees to offset the cost of helping with retirement, a trade-off that seems counterproductive. Others have simply frozen their pension plans pushing workers to seek the alternative self-directed method of ensuring a secure retirement.
Some of these moves have actually forced the employee to invest more and the latest numbers published by Fidelity point to an increase in the average balance in these plans. yet the average balances, now estimated at the 2010 year end were still far below where they actually needed to be. If you had invested steadily over the last decade, your balance, according to Fidelity is around $180,000. If you are within fifteen years of retirement, you are still hundreds of thousands of dollars away from what is often considered the optimal balance.
The 14, 16, 18 Rule
For most investors - I prefer this term to overused "saving for retirement" - the accumulated balance in these plans should equal 14 times your last year's salary. Aon Hewitt points to a need for 16% of the salary of the 31 to 45 year old group as the goal, which includes the total amount of available benefits such as Social Security and any pension plans they might have. Because the youngest workers can count less on these additional sources of income for retirement, they will need 18% of their salary to make retirement comfortable.
If plan participants at Fidelity are any indication, these plans are moving in the right direction. Over a million people involved with the Fidelity offerings have accessed their online tools or simply called for advice. According to Beth McHugh, vice president of market insights at Fidelity, the answer to how much you will need still depends on the worker taking control of the plans. She suggests "At the end of the day saving at appropriate levels, saving continuously and ensuring that you have the appropriate asset allocation are the most critical components to help ensure that you have sufficient savings for retirement."
But contribution levels still remain lower than they should be. The average participant has increased their contribution, but from a paltry 4% to a better 7%. Yet this increase is still far from what the investment and retirement community would like to see workers contribute. Add to that the lack of portfolio diversification once they are in the plan, little effort by the participants to rebalance on a regular basis and for older workers, adequately defining the risks they are taking with those investments all increase the chances that these plans are not doing as well as they could.
Some of the uncertainty of retirement needs may be the problem. Not knowing the impact of taxes (although there has been an increase in the amount of Roth 401(k) options in many plans) and the negative effect of inflation. workers are underestimating what they might need and if they are making educated guesses on that number, taking too many risks too close to retirement to try an offset those issues.
The Selfish Approach
Perhaps the worker should instead frame the plan in a more realistic way. Most advice offered on how these plans should be spent down once you retire involve a suggestion that returns on the plan in a post-employment environment should be all that the retiree tap. This avoidance of using capital - in other words protecting the balance in the plan at all costs, may have created a greater worker angst than is needed.
Focusing on preserving wealth as an heirloom is not how these plans should be calculated. In a era of less, the retirement planning employee should be focusing on what they will need first and not so much on what they might leave to their heirs. While prudent lifestyles are still a great help - both prior to and after they retire - being selfish in your projections is not necessarily a bad thing.
