The benefits of 401(k) plans for participants include favorable tax treatment, portability, diverse fund selection, and shared administrative expense. Most employees have heard of the term 401(k) and generally know if their company has a plan in place, but several studies have shown that corporate retirement benefits go underutilized. There could be a number of reasons for this, but participant education is likely a prime culprit.
The reality is most of us didn’t learn about retirement savings, personal wealth management, or investment choices in school. What we did learn was either from our parents or self education. And since most of us have other concerns that seem more immediate, retirement saving is something that is often ignored, punted down the road, or done without enough consideration.
Industry professionals, and even some employers, are aware of the issues too. A study done by the National Institute on Retirement Security, “The Retirement Savings Crisis: Is It Worse Than We Think?” raises the same concern. The report found that the savings gap among working households age 25-64 was between $6.8 to $14 trillion dollars. Yes, trillion. The report also showed that 92% of working households don’t meet savings targets, even with conservative measures and working until age 67. This is why you hear so much about the looming retirement crisis.
This information hasn’t been lost on our legislators. In a bi-partisan effort, the House of Representatives recently passed the SECURE Act which they are hoping will help Americans save more, be given more options, and manage their personal finances more effectively. The effectiveness of some of the bill’s measures remains to be seen, but the fact that retirement readiness has made its way to the highest level of government shows it is a hot button issue.
Unfortunately, legislation will only take us so far. Since the data suggest that most workers won’t take the time on their own to learn, either because they can’t afford to (in dollars or time) or don’t have the capacity, it’s often the case that the only investment and savings education that a person receives, or has access to, is through their 401(k) plan at work. Depending on how a company’s plan is set up, in terms of fund line up, educational resources available, investment advisor access, and fee structure, a company can be setting up an employee for success or failure.
By no means is participants’ personal financial success the responsibility of an employer, however, having a well-designed plan that acts in participants’ best interests is a legal requirement and the right thing to do ethically. Ideally, your program should offer information that educates participants on the benefits of saving, explains the investment options available, and helps set up savings and retirement goals. This can be beneficial to the company. Studies show financial security can help employee morale, lower stress levels, and improve loyalty.