401k Plan Design Simplification Improves Retirement Readiness

401k Plan Design Simplification

401k Plan Design Simplification Improves Retirement Readiness by Robyn Kurdek

401k plan design simplification can counterbalance the complexity of many retirement plans.  Plan complexity can be more of a hindrance to workers’ ability to save for retirement than financial experts realize. The 401k plan design and the corresponding jargon associated with 401k plans and other employer-sponsored retirement plans stymie a lot of people.  This can create more questions than the challenges around making investment decisions or managing dueling financial priorities.

A recent whitepaper from the fintech firm Dream Forward, which sells 401k plans with an artificial intelligence chatbot is dedicated to retirement. Dream Forward wanted to know what 401k plan questions its chatbot received most commonly from employees. In the course of its research, the firm made a shocking discovery. The majority of chatbot questions centered on 401k plan basics and decoding financial jargon.

According to Dream Forward, “…the complex nature of 401(k) accounts are a much bigger barrier to saving for retirement than financial experts realize. Based on our chatbot, we’ve noticed a large disconnect between the way 401(k) plans are designed and the average American’s knowledge of financial terminology.” In short, workers perceive planning and saving for retirement as a complicated, confusing endeavor. Which means as an industry, there’s likely a lot of room for 401k plan design simplification which can drive improvement in how we help retirement plan participants build financial stability for the future.

Approximately 63% of the questions directed to Dream Forward’s chatbot focused on tax rules, 401k plan design simplification basics, and financial terminology: i.e., “How much money do I need to save to get a match? How does my money get from my paycheck into this account? How does the 401(k) impact my taxes?” Other questions revolved around financial planning and investing.

According to Dream Forward, the typical narrative about America’s retirement savings crisis and workers’ underfunded nest eggs is only part of the story. Again, the structure and complexity of U.S. 401k plans is just as much a concern as the macroeconomic trends impacting Americans’ ability to save adequately for retirement. Dream Forward cites examples of getting money out of a 401k plan, such as in-service withdrawals, 401k plan loans, avoiding early withdrawal tax penalties, qualifying for hardship withdrawals, in-kind distributions, etc. Depending on their 401k plan’s rules, employees may have to navigate one or more of these extremely complex withdrawal transactions at some point in their lives, and according to Dream Forward, it boggles-the-mind.

The firm observes, the 401k plan system is mostly voluntary, and in their opinion “the uncomfortable truth is that a voluntary system isn’t working.” While Dream Forward sees going back to a mandatory savings system as the best case (and most unlikely) scenario for getting people to save more for retirement, the firm says our next best hope is redesigning 401k plans and similar workplace retirement savings plans to be less complex.

Dream Forward suggests three ways to improve and simplify 401k plans to make them more effective:

  1. Streamline 401k plan rollovers, making them easier for workers to execute, including updating U.S. rules and regulations around rollovers;
  2. Dramatically simplify 401k plan rules and regulations, and eradicate jargon to make it easier and simpler for employees to save for retirement; and
  3. Leverage technology to reach workers at critical decision points during the 401k plan enrollment process (rather than letting them speed through it themselves, potentially making mistakes with possible lifelong financial consequences).

As industry pundits pointed out when we recently passed the 401k plan’s 40th anniversary, it may be high time for America’s voluntary retirement plan system to get a makeover in the form of 401k plan design simplification. Times have changed, as have workers’ needs and savings habits. It now seems the appropriate time to change the 401k plan design of workplace retirement savings plans.


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