A recent WSJ article claims a new analysis finds retirement savings plans are not fulfilling their mission. As a practicing financial professional with over thirty years specializing in retirement planning, my observation is that the plans offered by Congress or individual states are not the real problem. People are the problem.
Sure, the different plans offered to Americans could be tweaked and improved, but for the most part it is people who are to blame. It is people who choose not to participate or not participate fully in their employer’s 401(k), 403(b) or other type of plan. It is people who choose not to save a portion of their earnings. A basic tenet for long term financial success is learning to live on less than you earn. That is a people problem.
I do a lot of work with employers offering retirement savings plans to their employees, often with generous matching programs that offer free, extra money to the participants to match their contributions to the plan. Even with a generous match, some employees don’t participate in the plan at all or don’t contribute enough to qualify for the full matching funds available. These people are consciously making a choice to pass on getting FREE MONEY from their employer. The plan is not the problem, it is the people.
Human inertia is a real issue when studying and analyzing retirement plans. Employers who add auto-enrollment features to their plans often see a marked increase in participation. Why? Because the employee doesn’t have to do anything to get enrolled and would have to take definite steps to get un-enrolled. The same is true for auto-deposit features. It is now fairly common for employer sponsored plans to auto-enroll employees and then automatically begin deducting a modest amount from employee paychecks. These plans often auto-escalate the amount of salary deferral up to a pre-determined amount, usually eight to ten percent of compensation. This is taking advantage of human inertia in a positive way because only a small percentage of employees opt out of these automatic plan features. Many experts agree that personal retirement savings rates in the range of ten to fifteen percent of compensation can result in savings amounts that could replace most or all of an employee’s earnings by the time they reach retirement age.
Current plans by Oregon to require businesses that don’t offer retirement plans to auto-enroll employees in an IRA account are likely doomed before they start. Similar plans in California, Connecticut, Illinois, Maryland and Oregon may face a similar fate. Auto enrollment is not enough. Auto deposit is a critical step to really begin to address retirement savings needs for Americans who are not already doing what they need to be doing.
Financial education is another key to financial success for many Americans. The level of financial literacy among a large portion of America’s population is, quite simply, appalling. In my work with employer sponsored retirement plans, we provide employee education and personal financial counseling as a part of our services. In my own experience, participation levels increase, savings rates increase, and investment outcomes improve as employees become more knowledgeable. With those foundational elements in play, employee outcomes tend to improve.
Retirement savings plans are not the problem. Overcoming human inertia and increasing financial literacy are important keys to fixing the real problem. Auto-enrollment and auto-deposit are powerful tools that can be used to help. Financial education and counseling from a trained financial professional can make an important impact on the problem. Ultimately, true financial success and enjoying a comfortable, carefree retirement is the result of doing a lot of little things consistently over a longer period of time.
About Eric Huthinson, CFP
Eric Hutchinson (http://erichutchinsonfinancial.com) is a certified financial planner with more than 30 years of experience in the areas of financial planning, investments, estate and tax planning. Hutchinson has professional affiliations with The Financial Planning Association, the Certified Financial Planner Board of Standards and the Investment Management Consultants Association. His new book “The Financial Briefing,” distills time-tested wisdom based on decades of professional experience and provides an overview of many of the financial and life issues everyone will face at some point.