When it comes to planning for retirement, the 401(k) plan remains king. On average, clients expect it to produce a third of their retirement income, more than from any other source. And beyond the quantitative aspect, 401(k) plans are favorably perceived; the vast majority of participants are satisfied with their plans and consider the fees to be reasonable.
However, despite the popularity of these plans and the positive light in which they're viewed by those who participate in them, many plan participants and business owners, particularly on the smaller end of the market, don't fully understand how they work, nor do they understand how their 401(k) account translates into an effective retirement income strategy. For the financial professional, this means significant opportunities to help participants better understand how to save and plan for retirement. It also means the chance to provide additional services to smaller businesses that may lack the resources to allow participants to take full advantage of a qualified plan.
Areas for improvement
A recent study by Guardian Retirement Solutions™ of the small-plan 401(k) market provides a snapshot of what's on the minds of participants. The small-plan market can be generally defined as plans holding less than $10 million in assets, which comprise 90 percent of all plans. By focusing on the actual experiences of participants, the study highlights specific improvement areas where financial professionals can add value to the retirement income planning process.
Retirement confidence may be misplaced
There's a paradox among participants between the income ratio goals they're targeting for retirement and their expectations for how they'll live in retirement. Although participants seek, on average, to receive 95 percent of their current salary in retirement, many expect to work part-time in retirement, reduce their standard of living, or delay the age at which they retire. Financial professionals can help clarify the confusion that participants have and ensure their goals and expectations are consistent and aligned.
Education could improve outcomes
Plan participants have minimal knowledge of 401(k) plan concepts. While there's general familiarity with some terms, such as contribution rate, vesting and account loans, there's a lack of understanding about what they mean and how they can actually help attain retirement goals.
For example, the RetireWell StudySM indicated that half of participants do not understand vesting of employer contributions. This means it's possible that employees might leave jobs without knowing the potential employer contributions they're leaving behind.
Without understanding basic investment concepts like dollar-cost averaging, target date funds or target risk funds, plan participants are challenged to adequately save for retirement. Lack of knowledge may also mean lower engagement, which can have a negative impact on retirement planning.
Potential for higher contribution rates
The RetireWell StudySM also reflected that the vast majority of participants are not contributing as much as possible to their plans.
Only 15 percent of those under age 50 are maxing out their contributions, while only 11 percent of respondents over age 50 were contributing as much as allowed. Plan participants are also preoccupied with fund accumulation rather than on how the money they've accumulated will translate to actual retirement income. Fifty-four percent focused on their 401(k) balance, but only 29 percent paid attention to the income their account can generate in retirement.
