With guaranteed employer pension plans and retirement funds virtually a thing of the past, retirement saving is increasingly being thrust upon employees who have little time, knowledge or interest in financial investments. Thats why 401(k) plan providers continue to innovate their offerings with more automated and customized features to accommodate the reluctant investor. Employers and advisers looking for a competitive edge should take note.
The 401(k) industry has been trying to make investors out of people who dont want to be investors, says Carl Londe, CEO of investment adviser ProManage.
Regardless, 401(k) plans are one of the highest ranked benefits in terms of their importance to employees on a personal level, according to Paychex.
In the past, people were taken care of. You worked and got a pension or profit-sharing contribution and somebody else made those investment decisions for you, Bill Mills, executive vice president of ProManage, adds. Weve now dumped that all on the participant.
Most people, he said, are not equipped to make those decisions or just dont want to do it.
We wanted to find a way to preserve the idea of somebody else making those investment decisions for you, Mills adds.
Using that same approach, ProManage and other 401(k) plan providers are focusing their efforts on simplifying retirement investment for employees, including managed accounts, automatic enrollment and guided investment information.
Through the use of retirement readiness statements, ProManage is pioneering a new way to offer employees a glimpse at their retirement future.
While many in the industry are already touting retirement readiness reports, according to Londe, these statements typically offer a limited projection of how much money participants can expect to retire with if they continue to invest as they have been.
While ProManages reports offer that same investment information, they also suggest alternatives that could garner better results. Our report shows you where you are and where you could be, Londe says.
The companys retirement readiness reports also put the investment advice into the context of when to retire, how much to save and how much retirement income is desired.
With that information, the company hopes to help participants understand its not just about needing to save more money, but understand that theres a trade-off between when youll retire, how much youll have in retirement, how much youre saving now and how youre investing, Londe says.
Turning point
This is truly a turning point in the industry, Mills adds. Up until now, participants were told everything that had happened. You got a quarterly statement telling you how much money came out of your check, how much money you invested in the last quarter. Weve turned the view for the participants from looking out the back window to looking forward.
The 2006 Pension Protection Act created what some have called an autopilot version of 401(k) via three key innovations in plan design: automatic enrollment of all eligible employees; automatic rises in deferral rates over time; and a selection of default investment options.
While participants retain the right to opt out, few do because of inertia and procrastination, both of which had historically ensured low enrollment rates, low deferrals and poor investment choices, according to a 2013 Principal Financial Group report A 360 Degree Approach to Preparing for Retirement.
According to the Employee Benefit Research Institute, the proportion of private sector employers offering a 401(k) has risen from 72% in 2007 to 82% in 2012. Auto enrollment also makes a difference in the number of employees participating in 401(k) plans, according to Paychex. The average participation rate of all 401(k) plans is 72%, while the rate with auto enrollment soars to 92%, the company says.
Thats good news for employers, too, because the price per employee goes down with more participants, according to Paychex. For example, the company says, if an organization has 10 eligible employees and four participate in the 401(k) plan at $170 per month, the resulting expenditure is $42.50 per month, per participant. If automatic enrollment raises participation to nine employees, the cost per month, per employee, drops to $19.
Another key benefit for employers is that automatic enrollment saves business owners and managers time by standardizing the 401(k) enrollment process for new employees, Paychex adds.
New features
Based on the success of automatic enrollment and default investment options, the Principal report predicts that a number of new features will likely be incorporated into life cycle funds in the near future, including a clear retirement income benchmark for participants at the outset, dynamic asset allocation, broad diversification and embedded advice. In particular, target-date funds are expected to transform.
Target-date funds have emerged as one of the top investment innovations of the last decade, holding $500 billion of assets in 2012 a figure likely to grow at a compound annual growth rate of 15%, the report says.
Evolving out of the traditional target-risk funds, target-date funds will morph into a best-in-class retirement product via two routes over time hybrid target-date funds and target-income funds, the report suggests.
Some funds will go even further and express retirement outcomes in terms of regular income, inflation protection, health care and bequests, it adds.
Putnam Investments has put the power of investing into your 401(k) right into the palm of your hand through the use of an iPhone app dubbed PriceCheck&Save. The app allows plan participants to use their iPhone to check and compare prices on almost any item, shows the difference in price as monthly income in retirement and lets users make a direct transfer of the savings, or a portion of the savings, into their 401(k) retirement plan.
A 401(k) plan can help companies out-compete for talented employees, particularly among smaller firms, according to Paychex. Ninety-seven percent of larger firms offer a 401(k) plan, according to CNNMoney.com. Yet the Small Business Administration reports only 24% of small businesses offer a plan.
