3% deferral rate for 401(k)s not nearly enough: Mary Beth Franklin

The fate of boomers’ retirement may be mostly sealed, but it’s not too late for employers to help rescue their younger workers — many of whom have misguided notions about how much money they should sock away.

“Employers and providers are in a role of making a bad situation a little better,” InvestmentNews contributing editor Mary Beth Franklin said Tuesday at the Society of Professional Asset Managers and Record Keepers’ national conference in Washington. “Workers are turning to their employers to figure out how to save more for retirement.”

While plan sponsors are nudging their participants toward retirement safety through the use of auto-enrollment in a 401(k) plan, such basic steps alone are insufficient when it comes to preparing for success in retirement.

According to one plan provider, that’s something employees don’t grasp. “Participants don’t understand how much of the plan sponsor’s actions are guided by the regulatory framework,” Chip Castille, head of BlackRock Inc.’s U.S. and Canada defined-benefit group said during an earlier presentation. “They think all sponsor activity is driven by paternalistic interests in participant outcomes.”

Instead of measuring retirement readiness through the number of people enrolled in a plan, plan sponsors should weigh their success by determining how many workers are on track to replace their income in retirement, Ms. Franklin said.

Those ideas include raising the initial salary deferral amount from the 3% standard. “Employees see this [number] as an imprimatur, but the deferral really needs to be closer to 10%, 12% or 15%,” Ms. Franklin added.

She also suggested that plan sponsors remove arbitrary caps on auto-escalation features, which automatically raise contribution amounts toward retirement plans.

“For those employers who are matching with an auto- escalation clause, let it go up to the IRS limit,” she said. “Don’t put artificial limits on auto-escalation.”

Ms. Franlin also suggested that employers alter their contribution matching formula to give employees an incentive to make higher contributions. “Rather than putting in 100% [matching] at 2% of pay, if you match 25% at 8% of pay, it will cost the employer the same but requires the employee to put in more in order to get the match,” she said.

Turning the savings conversation toward income also is a way to push workers to hike their savings rates. “Employees would be better served if they could understand how much income their current savings can buy,” Ms. Franklin said. “Translating 401(k) balances into future retirement income is one of the most effective ways to get people to increase salary deferrals.”