How to Build Better Retirement Plans

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Whether you call it a crisis or just a shortfall in savings, Americans are not saving enough for retirement, but some of the "fixes" that have been offered aren't making much of a dent.

Take financial education. "There is a need for financial education but we haven't found anything that works," said Steve Wendel, head of behavioral science at Morningstar, who spoke on a panel on how to build a better retirement at the firm's annual conference in Chicago. "The consensus in our field is that these programs don't work. … The outcomes are not there yet."

What has been working, according to Wendel and other members of the panel, is "just in-time financial education." That's when individuals are educated on a financial decision soon before making it, such as committing to a mortgage or selling some stocks. "Advisors do that, walking people off the ledge," said Wendel.

(Related: 10 Barriers to Retirement Preparedness)

Also helping Americans save for retirement is automatic enrollment, "the single most powerful tool to increase savings rates," said Wendel, but it's imperfect.

The traditional 3% default rate "is not enough," said David Blanchett, head of retirement research at Morningstar. "We need greater default rates."

Daniel Bruns, of Morningstar Investment Management, noted that automatic enrollment has increased employee participation in defined contribution plans but not necessarily contribution levels. 

"To really have an impact on employees contributions you need to go from 6%  to 12%," said Blanchett, referring to the percentage of salaries that are automatically contributed.

Also needed, according to Blanchett and Wendel, are larger employer contributions on behalf of employers. "I'm not convinced we will get to a meaningful level of savings in the U.S. without it," said Blanchett, who extolled Australia's mandatory Superannuation system in which employers contribute a minimum 9.5% of each employee's salary and employees have the option of contributing on their own behalf — both invested according to employees' choices.

In the U.S. employers and employees each contribute 6.2% of an employee's salary towards Social Security and large employers often match half of an employee's contribution to a 401(k) plan up to 6%.

Bruns said he wished employers would contribute more to their employees' retirement accounts but doubted they would especially since many already match a portion of employee contributions.

Asked by a member of the audience if contribution maximums should be lifted on 401(k) plans, Wendel said the intent is "excellent" but the effect probably nonexistent. "Most people are not saving enough now. … More people would benefit from raising IRA contribution limits."

The current contribution limit for IRAs is $6,000 per person; and $7,000 for those 50 and older;  for 401(k) plans, the limit is $19,000 with an additional $6,000 allowed for participants 50 and older.

Employees can contribute to both if their modified adjusted income is not above $74,000 for single tax filers and $123,000 for joint filers but the IRA contributions in those cases will be on an aftertax basis.

— Related on ThinkAdvisor:

• 10 Barriers to Retirement Preparedness
• Who's Responsible for Your Parents' Nursing Home Cost? It's Not Who You Think
• Retirement Planning Ain't What It Used to Be