401k Plan Design Helps Workforce Become Retirement-Ready
401k plan design can help a workforce more than we think. Americans are optimistic about how much they’re saving for retirement. In fact, the majority believe they’re on track for a comfortable retirement, according to a new survey. 401k plan design may be able to play a role in getting plan participants closer to reaching their goal. More than two-thirds of Americans were generally positive about their financial position, indicating they are either comfortable, or will have saved enough by retirement, says a new report from Natixis Investment Managers cited by Employee Benefit News.
However, that optimism may be misplaced. The reality is, many Americans are woefully under-saved for retirement. And some of those that Natixis surveyed seem to recognize their precarious financial position. Thirteen percent said they don’t think they’ll ever be able to retire. Poor 401k plan design can be attributed to some of that shortfall. The remaining 20% in the middle expect to struggle to save enough.
The latter seems more in line with broad industry research. According to Fidelity, the average 401(k) balance is less than $96,000. What’s more, almost 60% of working-age Americans have nothing saved for retirement at all, according to a report from the National Institute on Retirement Savings. The decade-long bull market may be inflating workers’ perception of their retirement readiness. The stock market hasn’t experienced catastrophic losses since the financial crisis in 2008, so many of today’s investors have never been through a crash or a major correction. The young investor experienced remarkable gains over the past 10 years, and they may have a false sense of security when it comes to the inflated value of their portfolios.
Regardless of age and life stage, there are some common threads that American workers share. For instance, it is likely that very few individuals are saving enough, no matter their age. Across generations, Natixis found that millennials expect to need $822,800 to retire and they’ve saved 10% of that goal; GenXers expect to need $980,500 and they’ve saved 17%; and Baby Boomers have saved 30% of the $1.02 million they expect to need to live comfortably in retirement. As such, many Americans will have to work longer than they expect. Millennials say they foresee retiring at age 61, which isn’t realistic for the majority. Moreover, 64% of Boomers aren’t taking advantage of catch-up contributions, as they should be. A portion of the shortfall could be attributed to the 401k plan design.
Shockingly, there is still a need for more financial education in retirement plans. In fact, Natixis found that 64% of workplace retirement plan participants say they need more education from their employers about their plans. Defined contribution (DC) plans that feature good 401k plan design features, such as, automatic enrollment, auto-escalation and an employer match, along with easy-to-use default investment options, like target date funds can make a positive impact. These 401k plan design features, similar to The Plan Sponsor University IDEAL Plan, can be successful at helping workers prepare for a comfortable retirement.
There are other bright spots on the horizon. Congress is making moves to make it easier for small businesses to offer retirement plans. More employers are getting on board with financial education and literacy programs. And there are proactive steps employees and employers can take to improve retirement readiness, according to Employee Benefit News.
According to an expert quoted in the EBN article, a focus on educating Millennials can make the biggest potential impact. One important lesson they need to hear is to not let their student loan debt get in the way of retirement savings. The Natixis survey found that 28% of Millennials surveyed who participate in a 401(k) plan said their college debt was the biggest reason they are not saving more for retirement. However, Millennials also have more time on their side to build wealth for retirement than other generation — an opportunity too precious to waste, EBN notes.
Financial literacy and education can help workers better understand and make the most of their employer-sponsored retirement plans. What’s more, employees want more retirement plan education from their employers. Coupled with access to retirement savings plans at work, education can help make a difference when it comes to improving retirement readiness and outcomes. It’s not a silver bullet, but perhaps fostering greater understanding of how their workplace retirement plans operate and function can help to give Americans more of a fighting chance at achieving a comfortable retirement.
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