In today’s low interest rate environment and diminished expectations of sustainable stock market performance, most plan participants need to be setting aside up to 20% of their earnings. But can they handle that demand on their current income? It depends on how you, as a benefit adviser, get them to that point, according to 401(k) fiduciary expert Christopher Carosa.

He recently polled financial advisers on the savings rates they estimate employees need to achieve, and 20% was a common response. That’s based on an 80% income replacement ratio and a level income and a 5% rate of return. Across a career, the resulting portfolio could be expected to generate that income for 35 years.

Of course, assumptions can be adjusted to an individual participant’s circumstances, including projected raises in income throughout the years. However, 20% at least represents a general goal for the average U.S. employee to strive for.

Telling employees they need to immediately begin setting aside this much of their income will likely backfire.

How to get them to 20%

Carosa, writing in Fiduciary News, lists important steps that can help move participants toward that goal. One is to use a matching formula that incentivizes participants to stretch their savings. Instead of a typical 50% match on up to, say, a 5% deferral rate, advisers can coach employers to try a 10% match on up to an 8% deferral rate, or some variation on that theme.

In addition to getting aggressive with auto-enrollment and auto-escalation features, experts cited by Carosa encourage advisers to be blunt with their clients and clients’ employees. For example, if a participant thinks that retiring at age 62 with a $1 million portfolio would work out just fine, that person could be asked how he would feel living on between $40,000 and $50,000 a year.

Similarly, if someone earning $100,000 thinks $1 million is a big deal, and intends to maintain his income in retirement, ask if he believes it would be a problem if his nest egg were exhausted after little more than a decade.

While these projections may appear very elementary, plan participants are often simply are too mesmerized by a projected retirement portfolio that sounds impressive, failing to translate the facts into a realistic retirement income stream.

Finally, Carosa describes what he calls the “totally outrageous” stunt approach. He cites the example of a 401(k) enrollment meeting in which participants were asked to picture themselves as greeters at Walmart in retirement. They were then given two sets of documents: The 401(k) enrollment materials, and a Walmart employment application.

“Blunt; to the point; effective,” Carosa describes this tactic.

Stolz is a freelance writer based in Rockville, Md.

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