The economic challenges of the past five years, increased longevity, American consumerism and the changing definition of retirement have all made planning and saving for retirement more difficult than ever. In my book, Transform Tomorrow: Awakening the Super Saver in Pursuit of Retirement Readiness, I argue that despite these challenges, we can create a nation of super savers, individuals who make a long-term commitment to saving.
Plan advisers have the opportunity to create the context for saving success through plan design, and to fundamentally change employees' and employers' beliefs about retirement saving through advocacy and education. The truth is, merely getting started on the right track is perhaps the most significant part of the retirement saving process. Consider the concept of inertia: An object at rest will stay at rest and an object in motion will stay in motion, unless acted upon by an outside force. The same is true for savers.
Default, default, default
The first, and arguably most important, thing plan advisers can do is encourage employers to use default features, starting with automatic enrollment. Automatic enrollment has a proven success rate: fewer than 5% of employees opt out of these plans, according to the Plan Sponsor Council of America. But it's not enough to just auto-enroll at the rather arbitrary industry standard of 3%. It's not enough to support a comfortable retirement.
As plan advisers approach automatic enrollment features, they should consider suggesting an increased auto-contribution rate from 3% to 6%, or even 7%. Some worry that setting default deferral rates that high up front would significantly increase the number of people who opt out of the plan. That is not the case. In fact, there is no empirical evidence that the average plan suffers from a higher rate of opt-outs when the default savings rate is 6% rather than 3%.
A 6% contribution rate is certainly better than three, but it isn't a high enough savings rate over an American's work life to fund 20 or so years of retirement. Auto-escalation puts extra force behind combating inertia by automatically increasing the contribution rate annually by an amount determined during enrollment. For participants who do not look at their statements, or even know the balance of their 401(k), the auto-escalation feature is literally life changing. Current retirement plan use of auto-escalation is at about 38%, and the majority of plans cap contribution rates at 6%. This important feature should be used more frequently, and the cap should be raised to at least 10% or more. Auto-enrolling participants at 6% savings rate, and then auto-increasing by 2% over each of next two years would result in a 10% savings rate.
When it comes to investment options, Qualified Default Investment Alternatives simplify investment decisions that often overwhelm employees who feel undereducated about selecting their own investment allocation on their own. QDIAs can keep plan participants on the right track by making the investment decision on behalf of a participant. Together, all of these tools reduce the need for workers to actively manage their retirement savings plans and makes saving and focusing on long-term investments automatic.
Plan advisers should become plan advocates, stressing the importance of retirement planning and saving to employers and employees. By shifting from product seller to problem solver, plan advisers are pushing for a secure retirement for each worker. Plan advisers are working with employers to make sure they are implementing the plan best designed for their employees' retirement, always keeping the focus on the end consumer. There's also an opportunity for plan advisers to help employers communicate with their workers by providing employers with educational content and creative strategies that stress the importance of saving for retirement and leverage tools available to employees.
Education is vital in making retirement readiness a priority and shifting employee inertia. Plan advisers can educate not only on the importance of retirement planning, but also on the options that exist for saving - whether those are 401(k)s, Roth IRAs, or other investments to supplement these plans. But it's important not to force concepts on employees that are so complicated that employees become overwhelmed and defer participation. Plan advisers must seek the level of financial literacy for employees that maximizes participation and reinforces positive behaviors around saving.
Plan advisers have the opportunity to make real change in the future of retirement readiness in the U.S. By offering and advocating for tools like auto-enrollment and auto-escalation, and by educating employers and plan participants about plan options and the importance of saving for retirement, plan advisers can increase participation and savings rates and raise the bar on what constitutes plan health.
By offering plans and solutions that have proven records of increasing plan participation, and by changing fundamental beliefs through plan advocacy and education, the state of retirement in the U.S. can be dramatically improved. The industry's goal must be to achieve secure retirement for all Americans.
Nybo is president of pension sales and distribution, Transamerica Retirement Solutions.
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