I had a chance recently to watch the piece about 401(k) plans by Martin Smith on the PBS program Frontline, “The Retirement Gamble.” The piece takes a critical look at the 401(k) plan as the central retirement savings vehicle for most Americans. Smith covers a brief history of the 401(k), the market turmoil that has shaken confidence in it, and the various points of confusion and conflicts of interest that can occur in the 401(k) marketplace. In short, it paints a worrisome picture of the retirement industry.
In general, this is good information for 401(k) participants to have. Lack of participant engagement is a dominant force in the retirement readiness arena that we retirement plan professionals work hard to counteract. Smith’s work to stoke the ire of 401(k) plan participants may inspire some of them to actually open and read the statements and fee disclosure notices we diligently send them. Cautionary tales about not dipping into your plan are important at a time when many people are doing just that.
However, Smith’s piece only paints part of the picture—saving for retirement doesn’t have to be such a gamble. He says next to nothing about what people can or should actually do to improve their retirement accounts besides keep working, and dream of winning the lottery. The advice to participants to request formal acknowledgment from their financial advisors of their status as a “fiduciary” is dubious at best (for one problem, it’s unlikely the average participant could draft a meaningful fiduciary contract). Smith’s piece does not reflect the recent legislative and litigation efforts—enhanced fee disclosure, increased fiduciary responsibilities—which, while slow to develop and long overdue, are nonetheless beginning to address the very problems Smith laments.
So, for participants who were left wondering, and for plan sponsors who are fielding questions, what can each of us do to improve our odds at a secure retirement?
1) Start saving! If you haven’t started already, or perhaps stopped as a result of recent economic turmoil, it’s critically important to set aside money for savings on a regular basis. How much? Typical recommendations range from 6% to 20% depending on age, investment style, current savings, and other factors. Many employers contribute regularly to 401(k) plans, as well, to help participants reach that target savings rate. A retirement income calculator such as Milliman’s PlanAhead for Retirement® tool is a great way to hone in on an amount to save.
2) Choose a diversified investment strategy. This doesn’t have to be hard. Selecting a target date fund counts as a diversification strategy.
3) Understand your plan’s investment and transaction fees (and the impact thereof) by reading the annual disclosure notice and the fees section of account statements. An HR representative can help with most questions. Employers are required to act as fiduciaries and should have additional resources for any questions they can’t answer themselves. Use this information to fine-tune #1 and #2 above.