There’s a growing “confidence gap” between retirees and workers in their ability to afford retirement, one that financial advisors who support 401(k)s and other retirement savings plans have an opportunity to help address.
America’s retirees say they’re less confident than last year about being able to afford basic expenses, healthcare and long-term care as they age, the Employee Benefit Research Institute (EBRI) reports. The reduced confidence is part of a growing concern among retirees about their financial preparedness to afford the rising costs of care as they age and skepticism that Social Security and Medicare will continue to provide the resources they need.
Meanwhile, eight in 10 workers told EBRI they will depend at least somewhat on assets from a 401(k) or other defined contribution plan for retirement income. More than half say their 401(k) will be a major source of income. Three in four who contribute to a 401(k) are confident they will have enough savings to live comfortably in retirement compared to 46 percent who do not have a plan, according to EBRI.
Given retirees’ experience, is workers’ confidence about retirement misplaced? Are 401(k)s and other employer-sponsored savings plans enough to sustain retirees for the rest of their lives? The answers vary not only from worker to worker but from employer to employer and from plan to plan. It’s an opportunity for what some advisors and client management professionals refer to as “customer improvement.”
Advisors can help bolster the effectiveness of retirement savings plans by first helping employers evaluate whether their plans are cutting the mustard. If a plan is failing to prepare a sufficient number of workers to retire, advisors may recommend changes and improvements for plans to boost participation, increase savings and step up retirement readiness. Doing so is critical if today’s confident workers are to avoid becoming tomorrow’s worried retirees.
It starts with evaluation and analysis of a particular 401(k)’s effectiveness. Top retirement plan providers offer tools to help advisors and employers ascertain whether a retirement plan is meeting its primary goal: to help workers accumulate enough assets to replace 75 percent or more of their pre-retirement income at age 65 or when they first qualify for full Social Security retirement benefits.
Providers who demonstrate best practices can show employers how helping their employees prepare to retire sooner rather than later may actually improve their company’s bottom line by reducing costs for salaries and benefits as workers age. Ultimately, it creates better alignment between employers and employees. Determining an employer’s long-term costs and liabilities may lead to productive discussions for enhancing retirement plan participation and contributions.
Best practices also demand that advisors help employers determine the impact of retirement savers engaging in certain behaviors that can thwart retirement preparedness goals. Those behaviors include taking loans or hardship withdrawals, suspending salary deferrals, or opting out of behavioral finance initiatives such as automatic enrollment or automatic deferral. Such behaviors can push back retirements by years, necessitating that workers stay on the job long after the traditional retirement age of 65.
Once an analysis determines there is a “gap” between a 401(k)’s goals and its actual effectiveness, advisors have an opportunity to evaluate potential solutions to problems such as mediocre plan participation, anemic contributions, behaviors that drain retirement savings, and a general lack of retirement preparedness. Often, those problems may be addressed through the right behavioral finance techniques and education.
While behavioral finance practices and programs are widely being applied by many employers, not every company has climbed aboard the bandwagon. Others may be misapplying or failing to maximize some techniques and therefore failing to get the desired result. Some plan sponsors emphasize education at the workplace while others fail to make use of it. Which techniques work best often depends upon the employer and the needs of the company’s employees. Some of the most widely adopted techniques are now considered best practices: