You, like others, may have become frustrated battling the issue of bumping your employees’ 401(k) savings. Some have tried using auto enrollment and auto escalation of 401(k) savings. This is like only using the Air Force and expecting to win a war.
I believe it is time to bring in the Army, a financial planner to help employees determine their unique glide path. One size does not fit all.
Defined benefit plan savings vs. 401(k) savings
If you are in a defined-benefit pension, such as a teacher, you would have a contribution of say 10% taken out of your pay automatically. Teachers also have a pension culture. They expect to make less in salary but have retirement security. One might look at this as income smoothing. This calculation is done by an actuary. The actuary starts with defining a future paycheck amount. They then work backwards determining what savings and rate of return is required. The actuary continues to adjust the calculations on an ongoing basis.
In a 401(k) plan, there is no professional making this calculation. There is no 401(k) savings culture. Typically there is talk of investing to get the match. You may believe that there is a website that the employees can use. I believe it were that easy, why does a company need to hire an actuary? The Illinois state pension system has shown that even with actuaries things can go wrong. Politicians have elected to direct pension funding to other projects. They hoped that investment returns would make up for this lack of savings. Employees often delay 401(k) savings believing that a bigger wedding and buying a home were more pressing priorities. Unfortunately, they weren’t given the benefit of actuarial-like calculations to know the future peril they may face.
Target date strategy or target 401(k) savings?
We focused way too much on investment glide path and not on savings glide path. The Pension Protection Act gave us a new type of strategy based on age. It also suggests that decreasing investment risk over time is the right thing. New research has that under scrutiny. Further, there is no agreement amongst all investment companies creating them on glide paths. Worse yet, you the responsible plan fiduciary or investment committee member is responsible for figuring what is best for your employees.
How does one create a 401(k) savings glide path?
I think that the problem regarding target 401(k) savings comes from the fact that most plans don’t have a financial planner compensated for helping employees determine a 401(k) savings glide path. Most plans are sold by brokers that can’t directly give advice to participants. Instead, their focus is on investments. Unified Trust and Putnam have both identified that savings is multiple times more important than investing. Savings rate is far more controllable than markets and stock picking.
I recommend that you find a retirement consultant that takes on fiduciary liability to be your architect. That person can help you find an investment advisor, skilled in retirement needs assessments. Firms like LPL Financial, provide advice leveraging Morningstar retirement planning research, delivered through their Worksite Solutions Program. Advisors delivering the advice are independent and registered as investment advisor representatives. Have you calculated your own 401(k) savings glide path? Even if you have, you should benefit from lower plan costs when your fellow participants start saving more.
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