Don't settle for less than the best in your 401(k) plan

BOSTON -- In America, we tend to want the best of everything. But when it comes to 401(k) plans we often have to settle for something less than best.

BOSTON -- In America, we tend to want the best of everything. But when it comes to 401(k) plans we often have to settle for something less than best.

Case in point: MetLife recently published a study suggesting that 401(k) plan sponsors are struggling to help workers translate the balances in their retirement account into income and as a result they are "missing opportunities to help their workers manage their 'nest eggs' long-term."

According to MetLife's "Qualified Retirement Plan Barometer," which is a study of Fortune 1000 defined-benefit and defined-contribution plan sponsors, one-third of plan sponsors describe their retirement benefits philosophy as supporting employees' effort to "create retirement income for the future," and two-thirds say that retirement income is an important objective of their retirement plan(s). Yet many continue to skew their plan goals, design, communications and decision support tools towards savings, rather than income.

In other words, many plan sponsors aren't offering a feature that some regard as a necessary ingredient of a best-in-class 401(k) plan. And that got us wondering. What are the best features for a 401(k) plan?

RETIREMENT INCOME: For his part, Lew Minsky, the head of the Defined Contribution Institutional Investment Association, said best-in-class solutions will vary significantly based on the dynamics of a particular workforce, company culture, and the like.


But he did note that more and more large 401(k) plan sponsors are beginning to develop plan designs and investment lineups that are geared toward maximizing the likelihood that plan participants will have successful outcomes.

"More and more plan sponsors focusing on framing their and their participants' goal in retirement income terms, and recognizing that participants need to have a plan for both the accumulation and 'de-cumulation' phases," Minsky said. "As a result, I see more plans developing creative strategies to get participants to save more and plan for their income need in retirement."

RETIREMENT ADEQUACY: Plan sponsors need to translate nest eggs into not only income, but also what experts call retirement adequacy. Those retiring at age 65 need to have 15.7 times their salary set aside to cover their retirement expenses, or 11 times their pay after you factor in the notion that the net present value of Social Security represents 4.7 times your pay, according to a Hewitt Associates study on retirement income adequacy. At the moment, most retirees have to do that calculation on the back of a napkin.

While many 401(k) savers have access to a calculator that might figure their retirement-savings shortfall, most don't have a tool that breaks down how much they have saved as a multiple of final pay, inclusive of how much they will get from Social Security, a defined-benefit plan if they have one, and other sources.

INVESTMENT ADVISORY TOOLS AND SERVICES: According to another Hewitt study, 401(k) participants who use the "help" tools and services provided by their employers tend to outperform participants who did not use the help tools by 1.86 percent net of fees.

In other words, if your employer doesn't offer such tools and service as target-date funds, seminars and workshops, online advice, one-on-one financial counseling, online guidance and managed accounts -- ask for them. And if your employer offers those tools, be sure to use them. By the way, Hewitt said the participants who lagged the help-using participants did so because the former had too-risky and inefficient portfolios. Of note, 37 percent of plan participants just surveyed by the Investment Company Institute indicated they had shifted investments to be more conservative -- away from stocks toward bond and money market assets.

OPTIMAL FEATURES: Besides having what some call a consistent advice methodology, experts also say that optimal 401(k) plans have an effective structure, the appropriate number and type of investment options, and a way to evaluate those investments, and fiduciary oversight.

For instance, the best practice 401(k) plans have -- in addition to target-date funds, investment advice and managed accounts -- are structured to offer automatic enrollment, automatic increase, transition support and retirement support. By the way, the vast majority of plan participants said that their employer does offer a good lineup of investment options, according to the ICI study.


FUTURE FEATURES: According to some experts, the new best-in-class 401(k) plans will not only offer auto-enrollment, but automatic re-enrollment for workers who have stopped contributing to their plans. In addition, the best-in-class plans will offer auto-escalation, as well as default investments selected by the employer instead of the employee and a default for withdrawals.



--MetLife report, "Qualified Retirement Plan Barometer Study":

--Investment Company Institute report, "Commitment to Retirement Security: Investor Attitudes and Actions":

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