Could your hands-off approach be harmful to your retirement plan?
When our family was young and busy, I had a laissez-faire approach to lawn maintenance. One spring, I saw a rather pretty flowering vine-looking thing growing out the side of one of our forsythias, and I kind of ignored it—for a few seasons.
For those unfamiliar with Pennsylvania, just so you know—despite all of your pampering and coaxing of your vegetable or perennial garden, your tomatoes will get blight and something will drop by to munch on your Hostas, but the human-and-dog-eating plant you DON’T want will grow like gangbusters and take over the whole neighborhood if you suspend your weeding efforts to drink a beer for so much as twenty minutes. I soon discovered that this “pretty flowering vine-looking thing” was actually a super-invasive species that had successfully camouflaged itself as it grew through our entire hedgerow and into the ground cover, sending out shoots in every direction that were now taking root and becoming new plants. It was choking off just about everything in sight, and when I found a brand new sneaker nearby, I concluded that it was even posing a threat to passersby.
I spent the next three seasons doing battle with the vine of doom—yanking it up, chopping off branches, and digging out roots. I did just about everything but set fire to it. And what could have been a ten-minute extraction of a much smaller plant several years ago became a multi-season psycho-weeding apocalypse involving power tools, yellow-jacket nest incidents, and bleeding knuckles. I felt like I was reclaiming our property from the Visigoths as I clawed my way back to horticultural normalcy.
A laissez-faire approach can make your retirement plan even harder to reclaim if you let things go too long.
Remember that employees actually expect to retire someday.
One of the problems with some 401(k) plans is the sponsor started the program just to meet their competition, or because they felt they had to offer “something” for their employees, but then let the plan run on its own and eventually languish. While attracting workers is a very good reason to establish a plan, a 401(k) plan doesn’t do much good if employees don’t know how to use it. And some plans limp along for years without much attention from the plan sponsor, meaning participants are probably not getting the education and opportunities they need. If the plan is otherwise meeting its compliance requirements, it is understandably not very high on the list of issues to address. Unfortunately, the costs of not addressing it are indirect and insidious – and ultimately expensive.
The problem arises when those workers in that plan then go to retire, and they find they do not have enough. And it’s not that they weren’t given the opportunity (hopefully they are at least given the DOL-required communications), but they may not have been reminded about the plan’s benefits, or adequately educated on why they needed to take action during their working years, or on how to use the plan’s tools. And they are stuck.
Unfortunately, because of human nature and the employee’s perspective, the tendency is going to be to blame the employer. Does a plan sponsor want former employees subsisting on Social Security only, spreading negative PR throughout your community because they didn’t think the retirement plan at your company was adequate? Does an employer want workers who can’t afford to retire, continuing in their jobs long past when they anticipated, possibly only half-heartedly? Probably not.
Yes, educating plan participants costs money, and so does having more people qualify for any matching contribution that the plan may offer. But these costs are more than likely a lot lower than the hidden costs of not taking action. Thinking from the perspective of the participant’s expectation of retirement can open up all kinds of opportunities for you to help your employees appreciate the plan more, which accrues some of the benefit back to the plan sponsor. And that can be worth a lot, paying back your investment many times over in terms of employee satisfaction and retention, and ultimately in happy retirees.
And while we’re thinking about the employees’ perspective…
Don’t forget about the monthly income side of the equation.
There is an easily fix-able flaw in the 401(k) system. I have been working with 401(k) plans since 1995 (for those who are actually doing the math, I started at Conrad Siegel fresh out of kindergarten). In the ensuing time period, I have seen 401(k) plans go through several phases. For the first maybe fifteen years of my experience, the focus of the 401(k) was accumulating as large a final account balance as possible. However, as time has passed, and more and more folks see their 401(k) plans as their primary retirement income source, the conversation has shifted towards translating this into a monthly income.
This makes a heck of a lot of sense; in fact, at Conrad Siegel we have been putting retirement income estimates on our participants’ statements for years. Why? Well, a couple hundred thousand dollars at retirement sounds like a lot of money, until you realize you need to spread that out over twenty or thirty years, remember, retirement is a journey, not a destination. And if you’re just starting out, how do you know how much to save now, if you don’t know what you need thirty years from now, and even if you did, you don’t know how that balance translates into a monthly income?
This does not mean that your plan needs to offer monthly income options (although it certainly can). What it does mean, though, is that you should be helping your participants understand how much of their annual income they are likely to need to replace in retirement, what kind of a final balance they are going to need to achieve that kind of retirement, and how much they need to save from their paychecks now in order to get there. (You can check out all of our Financial Wellness tools we provide to plan participants here!) Fortunately, most 401(k) providers have tools that help in understanding this; the trick is ensuring your employees are aware that these tools are available, and know how to use them. It might just be a matter of having your provider conduct some education meetings, or show you how to educate participants on using the tools yourself. Consider what you could be doing as part of your new employee onboarding experience. There are a lot of possibilities.
And again, this goes back to our first point – take action now so your employees are well equipped to retire later, when you can’t make up for lost time.
Concerned that your employees don’t understand how to use their retirement benefits? Contact our experts today!
Scott Gehman, ERPA, CEBS
Retirement Plan Consultant