It's widely agreed that individuals must fund a greater share of their retirement. Three-quarters of workers surveyed by Natixis believe the responsibility increasingly rests on their shoulders and not on their government. Yet American workers remain woefully unprepared. Although they expect retirement plan savings to be their biggest source of retirement income, our research found that four in 10 active 401(k) participants are contributing less than 5% of their salary to their plan — far short of what they are likely to need. What can be done to help workers better prepare for secure retirements?
We need to recognize that retirement shortfalls are partly the result of a fundamental disconnect. Many individuals are not actively engaged in investing their discretionary income, and yet we ask them to step up as investors within their retirement plan — without the knowledge, skills and support needed to commit to saving and making good investing decisions.
HOW TO HELP
There are several steps advisers, working in partnership with retirement plan sponsors, can take to address this disconnect to enhance plan offerings, increase savings and promote greater participation.
1. Offer education. Nearly all advisers (95%) surveyed agree that, when their clients better understand the 401(k) plan offered by their employer, they are more likely to increase their contributions. Advisers should encourage employers to offer basic plan participant education to get things rolling, add more sophisticated training later on and be able to provide that education themselves. Resources abound for plan sponsors and advisers who want to help workers learn more, with asset managers, brokers and others providing educational and portfolio-construction tools.
2. Shift to a focus on income. Savings goals mean much less than retirement income goals, but too many workers think only of maximizing assets, not about the ultimate purpose of those assets: generating retirement income. Even though only 46% of 401(k) participants think their current level of savings will provide them with enough income to cover their entire retirement, many plans still encourage a mindset focused on asset accumulation.
Advisers can help plans build better tools for assisting workers to estimate their income needs in retirement. Even more importantly, they can help identify investments that help them achieve their retirement funding goals and recommend better risk controls that can help them avoid mistakes that could leave them short of goals.
3. Encourage better plan design. Advisers should urge sponsors and record keepers to adopt such features as automation — auto-enrollment, auto-escalation of contributions and auto-rebalancing. They also should support a strong match. Our research found that, for many investors, savings matches are by far the most important incentive employers can provide, with half of those who opt out of their company's 401(k) plan saying that the lack of a company match — or too small a match — was a reason for not participating.
4. Provide access to advice. Nearly nine in 10 investors surveyed believe that getting professional financial advice is critical. There also is evidence that advice works: Workers with advisers have account balances nearly twice as large as those who do not. Advisers should encourage employers to make targeted advice available through the retirement plan and help provide unbiased investment guidance that is suited to individual income generation needs and risk tolerances.
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These efforts must be ongoing. For example, retirement plan communications sometimes cover the features of the plan and some rudimentary education, but stop there. It is equally important to take individuals beyond a basic level of understanding to help them transition from savers into savvy investors and educated consumers.
Edward Farrington is executive vice president of retirement and offshore sales for Natixis Global Asset Management.