Your Employer Thinks You're Sabotaging Your Retirement

401k options at workToday's generation of workers faces a much different situation than their elders when it comes to saving for retirement. Whereas the vast majority of companies used to provide pensions for their employees, the trend recently has been for employers to get rid of pensions in favor of setting up 401(k)s and similar employer-sponsored retirement plans for their workers.

A recent study from Towers Watson took a close look at whether employers' 401(k) plans are meeting the objective of helping workers prepare for a financially secure retirement. What the study reveals about how employers think about their plans and what workers do with them says a lot about differing attitudes toward 401(k) plans.

Good in Theory, Bad in Execution

The most telling statistic from the survey was the disconnect between employers' intent in setting up the plans and their perception of whether workers are actually using the plans well.

Almost three-quarters of employers surveyed said that one primary reason they offer a 401(k) or similar plan is to ensure that their employees will have adequate retirement income. Yet...
  • Only about a quarter of employers believe that their workers make informed decisions in investing their 401(k) money.
  • Nearly three-quarters of employers have doubts about whether their employees have realistic expectations about how much their 401(k) accounts will be able to provide for them after they retire.
  • And only one in 11 employers thinks that workers have explicitly set income-based goals for their retired years.
That matches up with similar doubts that employees have about the plans. A previous Towers Watson study found that the majority of workers with only a 401(k)-style plan aren't confident about their money lasting through a typical 25-year retirement lifespan.

Making You Eat Your Broccoli

Employers are taking some steps to try to boost retirement readiness.
  • Automatic enrollment in 401(k) plans, where new employees have to affirmatively choose not to be part of the plan, has boosted participation substantially.
  • Despite many companies temporarily suspending employer matching programs during the recession, the majority of those companies have restored that benefit, and now, 91% of all companies that responded to the survey offer an employer match.
  • In addition, more employers are adding money to workers' plan accounts, with a quarter offering profit-sharing contributions that aren't based on employer matching.
Another more recent innovation that many workers are using is automatic escalation, which gradually increases contribution percentages over time. With almost half of the respondent companies making automatic escalation a default under their plans, workers will end up putting successively more of their money toward retirement saving year after year.

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Still, employers aren't doing everything they could to support their workers. Despite the overarching objective of helping workers save, employers tend to make decisions about their plans based on other factors, including cost, competitiveness with other employers in the industry, attracting and retaining employees, and meeting the burdens of regulation and compliance.

Invest Smarter

From an investing standpoint, the best news from the study is the increased availability of cheaper and more flexible investment options. Historically, 401(k) plans have been highly dependent on actively managed mutual funds, but you'll find a greater number of employers offering passive investments like index funds as an alternative.

Target-date retirement funds, which change their strategy over time as workers approach retirement age, have also gained in popularity, with many employers seeing them as better default options than money-market funds. And even better, 42% of employers now offer self-directed 401(k) options that allow workers to pick a much wider variety of stocks and other investments.

Make the Most of It

Even as some 401(k) plans are getting better, the onus is still on workers to explore their plan options on their own and commit to taking maximum advantage of their favorable provisions.
Automatic enrollment may be better than nothing, but default choices are never as good as tailoring your decisions to your particular needs and goals.

When more workers take that extra step, employers should be more confident that their employees aren't sabotaging their own retirement prospects.

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