I read a blog post from the Squared Away Blog (Center for Retirement Research at Boston College), which highlighted findings from an Allianz study that surveyed more than 1,000 Baby Boomers and Generation-Xers. Not surprisingly, the vast majority of those in the survey that admit to being behind on their retirement savings wish that they could save more. But, as we’ve said many times before, life gets in the way, especially for lower-income households, where wage growth has been muted for quite some time, and household expenditure growth continues to outpace wage growth. As a result, they are correct in being concerned!
Unfortunately, and despite understanding that they need to do more, many are contributing 3% or less, which will never be a rate sufficient to generate even a decent retirement. The Squared Away Blog also pointed out that these participants also tend to be somewhat risk-averse in their asset allocation. But, can you blame them, especially given what has transpired in the markets since 2000? Furthermore, most of these participants have never taken an investment class, so why should we assume that they would understand and appreciate cycles within the markets?
As much as we’d like to see DB plans remain the plan of choice for employers and employees, we understand that the trends are not favorable, particularly for the private sector. As such, we would like to see several things done to improve 401(k)s for those that are given access to them. Many of these are being adopted, but we’d prefer universal acceptance to protect the plan participant from “retiring” without the financial means to truly do so.
Payroll-deducted savings account sidebar that would allow for pre-tax withdrawals to fund an emergency account that would reduce the need to withdraw from one’s “retirement” account prematurely.
Auto-enrollment – Participant could decline to enroll, but they would have to take the action.
Auto-escalate with regard to contribution rates – Timing of the escalation should be every three years, at a maximum.
No premature withdrawals when switching jobs. Account balances must be shifted into new employer’s 401(k) or participant’s IRA.
Target date funds as the QDIA – Not all TDFs are the same, and significant differences with regard to key features can impact the participant’s long-term success. Be careful when choosing the provider.
Make sure that low-cost index fund options are available. Expense ratios have been coming down, but remain high for many “active” products.
Fewer options in a fund line-up – Studies have shown that too many options lead to paralysis.
We are not fond of lump-sum distributions and prefer that 401(k) providers annuitize a significant portion of the participant’s retirement funds to be used to support monthly payouts throughout retirement.
Finally, we’d like to see employers step up to the plate and do more for their employees, too, especially given the dramatic reduction in corporate tax rates. If an employer is too small to offer an affordable retirement plan, they should be required to provide pre-tax payroll deductibility to fund state or federally provided retirement plans.
We could go on, but adopting most of the above suggestions would go a long way to securing a more financially stable retirement for all.