As reported recently by The Associated Press, the imminent retirement crisis facing us has only worsened due to the 2008 Great Recession and subsequent stock market crash, and will negatively impact huge numbers of Americans for decades.
The AP correctly identified the root causes of this crisis as the result of three intersecting factors:
• Social Security is going broke and needs to be reformed. Any such reform will likely result in future retirees’ paying a higher payroll tax, seeing a reduction of benefits and having to wait until age 70 to receive their full benefit.
• Most companies have eliminated traditional pension plans that guaranteed employees a monthly check in retirement.
• 401(k) plans have failed to make up the gap created by terminated pensions. Participants haven’t saved enough, have invested poorly, and have seen much of their wealth disappear with two stock market collapses in the past decade.
The result will inevitably lead to people working past age 70. Living standards will fall; poverty will rise among the elderly.
Congress and the Department of Labor have recognized the immensity of the problem and, therefore, have completely changed directions over the past decade by passing laws and regulations that actually encourage forced participant savings and offer fiduciary protections for Plan Sponsors that offer plan participants an avenue to get investment advice.
Now the 401(k) industry and Plan Sponsors must work together to more aggressively implement all of the opportunities at their disposal to help give more Americans—Baby Boomers, in particular—a fighting chance.
Too many Plan Sponsors and 401(k) consultants have focused the majority of their fiduciary governance on the performance of each of the individual fund options, under the premise that failing to do so might put fiduciaries at risk of being sued
by disgruntled employees. While it is important, this perceived fiduciary liability of below-average fund performance is over-hyped. In the end, it will have little bearing on whether a 401(k) plan participant will retire with enough money.
The focus on individual investment results vs. actual participant outcomes has led many 401(k) participants to not receive the help and guidance they need the most—namely specific answers on how much they are going to need, how much they are going to have to save, and what is the proper asset allocation strategy necessary to fund their desired retirement benefit.
The results are devastating: Participants, on average, save just half what they need, have made poor investment decisions that often fail to even keep up with inflation, and are now on track to replace only 58 percent of their income.
We must do better. However, plan providers will need to change their focus away from being in the “investment business” and instead be in the “retirement readiness business.”
Plan sponsors need to be more comfortable in being more parental and they should implement provisions that “force” plan participants to consider saving more and investing differently.
Retirement readiness design considerations should include:
Auto-Enroll and Auto Re-Enroll EVERYONE: Plan sponsors should consider re-enrolling every single employee regardless of age, tenure, salary, or cur-rent deferral at a minimum deferral rate of 6 percent per year. Many companies are doing some of that, but limit it to new hires at an average rate of 3 percent. Sponsors should be more aggressive
and consider re-enrolling everyone de-ferring less than 6 percent.
Auto-Increases: Plan sponsors should increase every employee’s deferral by 1 percent a year until they are saving at least 10 percent of pay. Sponsors should adopt a goal of having 90 percent of their employees at or on track to defer 10 percent or more. Auto enrollment coupled with auto increases is the best way to accomplish this goal.
Forced Diversification: Most participants have not properly diversified their account balances among the investment options available. Plan sponsors should consider re-investing all participants into an age-appropriate customized investment allocation or suite of target-date investment options.
These features can still give plan participants a pre-emptive “opt-out,” thereby avoiding many of the fiduciary concerns surrounding these “forced” participant decisions. Yet, even when allowing participants to “opt-out,” our experience has been an overwhelming acceptance rate of more than 80 percent.
Participants want help. They know they need the help. The government is encouraging the industry to offer them help. Our only hope in positively moving the needle to address the looming retirement crisis is to aggressively implement provisions that provide plan participants with the help they need.