For millions of Americans, achieving financial security in retirement hinges on one thing: a 401(k).
But the fact is, 401(k) plans were never intended to carry that burden. First introduced in the 1970s when most workers still had pensions, 401(k)s were intended to be a supplement. But as companies moved away from pricey pensions, 401(k)s grew, and today they hold a whopping $3.5 trillion worth of retirement assets.
While that bit of trivia won’t alter your retirement planning, there are plenty of other “hidden truths” about 401(k)s that just might. Here are a few things you should know:
- There’s no crystal ball. When it comes to calculating how much money will be enough for retirement and figuring out how to convert that into a regular income, most workers are on their own. According to a 2012 study by MetLife, only 28 percent of employers offered tools that automatically projected how much income a participant’s 401(k) might generate in retirement. Most employers offer some help for participants to do their own projections, but participants generally aren’t very enthusiastic about tackling it themselves.
- The “fee transparency” myth. Department of Labor regulations require plan providers to disclose all fees that companies and workers pay for their 401(k) plans, but those “disclosures” can be vague. Some may reference a fund’s “expense ratio,” which can encompass many things, or disclose a range of fees such as 0.25 percent to 2 percent, none of which is very revealing. Also, fees aren’t usually compared with industry averages, so it’s hard to know how good they really are.
- Auto enrollment isn’t a magic pill. The practice of automatically enrolling employees in 401(k) plans, even if they don’t opt in, has risen in recent years according to Towers Watson. But that’s no guarantee those employees will save enough, and most don’t. Many companies exacerbate the problem by setting default contribution rates low so they don’t have to match as much.
The takeaway? No one can afford to be complacent when it comes to retirement planning.
Millions of workers now rely on 401(k) plans as their main retirement savings, but most simply aren’t saving enough. There’s still an estimated $4.3 trillion retirement income deficit for Baby Boomers and Gen Xers, according to the Employee Benefit Research Institute.
Employers are working hard to change that by re-tooling the investment structures of their plans, offering better options, and providing greater educational opportunities for employees. Here are a few trends for employers to keep an eye on in 2015:
- Increasing matching contributions. Employers looking for low cost ways to improve their 401(k) plans and incentivize participants to contribute more are increasingly stretching their matching contribution formulas. The most common formula has been 50 percent of the first 6 percent, but some employers have stretched that – to 25 percent of the first 12 percent, for example.
- Auto enrollment. It may not be a magic pill, but plans that use auto enrollment, auto escalation, and annual re-enrollment into target date funds see participation rates in the 90 percent range.
- Better online employee education. Everyone has unique retirement goals, and employee education is becoming more personalized and increasingly offering tools through online venues.
To find out more about how employers and employees can make smart decisions about their 401(k) plans and achieve financial security in retirement, talk to the retirement planning experts at Heffernan Insurance Brokers.