Some of the most interesting events to watch at a track meet are the hurdle events. There are highly trained sprinters that not only have to run fast but jump at set distances. The result is that the runner could stumble at any time and never finish close to the goal in mind. It is much the same with 401(k) plan participants.
The first retirement income hurdle to clear is if the employer even offers a Defined Contribution Plan, of which the 401(k) is the most common. According to Robert Grossman, as reported in HR Magazine April 2010, only 63% of companies offered a DCP in 2005. Some companies have dropped their plans with the recent economy. Lets say that 60% of workers are eligible to participate in a plan. Therefore 40% of individuals do not have this option and they LOSE. That leaves 60% in the running.
The second hurdle is whether employees participate in the plan offering. It is well known that the higher income and older employees have a higher participation rate then low income and younger employees. It has been estimated that 60% of eligible employees participate in the 401(k) offering. That means there are 36% still in the running for meaningful retirement income.
The third hurdle is adequate contributions. Study after study indicates that employees are not contributing enough and not starting early enough for a meaningful retirement income. Studies suggest that employees should save 10% a year to avoid retirement disappointment. The average is less than 6%. Which means 66% will be left short and not have adequate income in retirement. That leaves 12% in the race.
The last hurdle is the investment returns participants can expect from their plans. Too many participants have below average returns due to poor investment decisions on their part but also due to plan design. It is the responsibility of the employer to have a plan with low fees and an adequate selection of investment options. Two thirds of participants get subpar returns, which means that only 4% of all American workers can expect adequate retirement income from their 401(k).
One suggestion to improve the 401(k) includes the employer using the services of an investment fiduciary. These individuals are advocates for the participants and provide actual investment advice and not just education. They often use model portfolios so that employees understand the level of risk in their plan. One of their goals is decreasing plan costs. The financial services industry has been gutting the participants returns with high and often hidden fees as reported on CNN – Nickeled and Dimed: Hands in your 401k
The retirement of American workers is too important. Changes need to be made and made now so that more workers finish the race without tripping over the 401(k) hurdles.