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401(k)s and the State of Retirement Planning

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The disappearance of traditional pension plans and uncertainty about the future of Social Security mean for most of us, life after work is not going to look like our parents’ retirement. To prepare, many workers are relying on 401(k) plans to do more than ever to save for retirement, and their employers are looking to help. By investing in better education around benefits and computer projection models, companies are helping their employees build their savings and prepare for the future.

Retirement readiness

The percentage of plan sponsors who feel most of their employees are financially prepared for retirement fell from 15 percent in 2011 to 12 percent in 2012, according to Deloitte’s 2012 401(k) Benchmarking Survey.

“Retirement readiness is a major concern for employers because it can negatively impact business,” says Scott Rice, group vice president and director of plan administration for SunTrust’s employee benefit solutions division. Employees who delay retirement because they can’t afford it continue to work for all the wrong reasons and are often less productive because of it. “They’re not there because they like the work and want to be there, but rather because they have to be there,” Rice says. 

Participant education

Luckily, 84 percent of sponsors reported that improving participant education was a top priority, according to the survey. To support this objective, sponsors are increasingly choosing plans that include options designed to empower participants to make informed choices. “We’re delivering more robust communication and educational tools than ever before,” Rice says.

Reaching out to employees through multiple communication channels (including online and in person), providing personalized investment advice and building automatic features into plans are just some of the ways sponsors are raising the bar on education and increasing plan participation among eligible employees.

Roths on the rise

All of this focus on education may be paying off in one area: Roth 401(k)s. According to the survey, participation in Roths rose slightly in 2012, and more than half of sponsors reported offering a Roth option, a jump of 6 percent over 2011.

However, more work needs to be done. “Participants still don’t fully understand the value of in-plan Roth contribution features,” Rice says. Roth contribution features work in reverse, letting you pay taxes on your contributions up front, so you don’t have to pay them on the back end. Despite this benefit, many employees may not fully comprehend the advantage of using after-tax dollars now to reap financial rewards in the future.

Retirement income projections

For the last 20 years, 401(k) investing has been all about accumulating savings. But this may be changing as more employers put retirement readiness to the test by conducting assessments for their employees to track their progress.

“Pension plans were based on actuarial equations. It was easy to look at the chart and see how long you needed to work to get a monthly retirement check that would allow you to live comfortably,” Rice says. Retirement disbursement amounts are not as clear with a 401(k) plan. “It’s just a big bucket of money, so it’s harder to know if you’re saving enough to last a lifetime in retirement,” he says.

Computer projection models can now show participants how variables such as their age, current savings, planned contributions and lifestyle considerations will influence their payouts at retirement. This shift could prove to be a game changer. In fact, participants who were given retirement income projections along with information on retirement planning increased their savings, according to research by The Center for Retirement Research, Boston College.

A number of income calculators are available online through nonprofits such as AARP, the Financial Industry Regulatory Authority and Choose to Save. Some plan providers, including SunTrust, also offer projected retirement income tools to participants as part of the retirement plans offered to their clients. Using these tools is an effective way to put your savings into more meaningful terms, which studies suggest can lead workers to increase their savings by an average of $1,150 per year.

“We can do a lot to increase retirement readiness by making 401(k) plans look more like defined benefit plans,” Rice says.


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