Retirement Outcomes: Keep an Eye on the Forest
Most American workers aren’t saving enough for retirement, often because today’s bills, goals and fun are more pressing than tomorrow’s needs. Many employees have access to a 401k retirement plan through their employer. These plans give them independence and the means to control their own financial future.
But access to a resource doesn’t mean employees are willing or able to use it to their advantage. Self-sufficiency and independence are American values. But the truth is, most of us are more interested in the idea of a financially secure future than we are in participating in the steps that get us there. Today’s employees need a better option to reach their targeted retirement outcomes. The private pension of the past isn’t likely to make a comeback. But employers can offer the next best thing: a 401k plan that offers all the simplicity of a pension plan but is funded by the employee.
Saving Money for a Stranger
Retirement readiness is a good thing for employers and employees but funding a future decades away usually loses out to immediate demands. In fact, a 2016 Prudential survey found that 56 percent of people feel that saving money for their future selves is like saving money for a stranger! Today, people look back on the days of pensions with longing for a couple of reasons. First, a pre-determined monthly income offers the comfort and security that IRAs and 401(k)s simply don’t, and second, because they were so easy! Work, contribute, retire, receive a check — no decisions required.
In a 401(k) plan, employees can make contributions and employers can matching a percentage of those savings. And future benefits fluctuate based on investment earnings and employee contribution changes. Where employers used to manage pension funds, employees can now make choices about funds, allocations and contribution percentages. This leads to choice overload, avoidance or learning painful lessons about the market. Most employees want a known outcome in retirement. It’s in an employer’s best interest to help them reach that outcome with the least amount of pain.
Easier to Focus on the Trees
For employees, it’s easier to focus on the trees than to keep an eye on the larger forest. Some workers get lost in plan decisions. Making choices without advice and getting caught up in beating the market are all great ways to lose hard-earned savings. Others find the whole topic frustrating and confusing, so they choose avoidance. They don’t save enough, may choose a target fund and let it ride, or ignore the whole issue until retirement is around the corner.
Employers can follow the letter of the law by focusing on benchmarking metrics, making sure fees are reasonable, and by being compliant with ERISA laws. Yet they forget that the purpose of a plan isn’t just to have a plan. The true purpose is to offer a real chance at retirement security for each employee.
Why Is the Forest So Important?
For employees, the goal should be to replace 60 to 80 percent of their income in retirement. At this income level, they can live a reasonable and comfortable retirement lifestyle. They want to be confident about their retirement income and how long it will last. And if they decide to work in retirement, they want it to be a choice, not a dire necessity.
Employers should share these goals because financial stress and insecurity hamper worker productivity. Workers who need to work after retirement age are expensive to pay and insure. They’re also potentially litigious if they followed company advice and still don’t have enough to retire. The prospect of financial security in retirement gives confidence, confidence creates loyalty, and loyalty improves productivity. That’s good for everyone.
The Next Best Thing
A 401(k) plan offering a managed solution does nearly everything for an employee, just like a pension plan. The only difference is that employees fund it on their own, usually with help from their employer in the form of a match. It’s true that employers can’t afford to provide pension plans any more. They can offer the next best thing, by helping their workers to create their own.