“”An investment in knowledge pays the best interest.””– Benjamin Franklin
Your 401K plan can be a beautiful thing. With the benefits of favorable tax treatment, employer match programs, investment customization, portability, and loan and hardship withdrawals, the 401K empowers employees with a vehicle to grow their nest eggs for retirement. Trouble is you never learned about how to manage a 401K account in school. It's like your parent tossing you the car keys on your seventeenth birthday, telling you to drive cross country, and walking away. You're in charge of your financial destiny but you don't have the training or time to properly care for it.
American Workers Not Prepared for Retirement
Plan sponsors are well aware of the gaps in their employees' retirement preparedness. In one popular study entitled “The Retirement Savings Crisis: Is It Worse Than We Think?”, the National Institute on Retirement Security used industry recommended savings guidelines from the brokerage firm Fidelity Investments to assess what share of households are on track to hit an income replacement rate target—that is, the share of a household’s pre-retirement income that it needs to replace in retirement to maintain its standard of living—of 85 percent. When assessing households’ readiness using the broadest measure of household resources—net worth—the report found that about two-thirds of near-retirement households were at risk of not meeting their retirement savings target as of 2010.
source: Center for American Progress
401K Education: Knowledge is Power
Many say that education is a basic human right. Unfortunately, most retirement plans, especially smaller plans, do not provide participants adequate education or tools. The evidence points to advice helping plan participants:
- “Advice has typically led to higher savings rates, better diversification, and a more consistent approach to saving for retirement.” (Schwab Retirement Plan Services, “The New Rules of Engagement for 401(k) Plans”)
- “People who received help could end up with more savings in their retirement plan—up to 70% more in some cases.” (Financial Engines/Aon Hewitt study, from 2006 to 2010)
- “There is considerable evidence that individuals who receive professional financial advice are more financially healthy than those who do not.” (US Department of Labor, “Do Financial Advisers Influence Savings Behavior?“)
Back to School?
Luckily, you don't need a 401K advanced degree. Most employees are too busy to attend extensive training. The good news is that “education” can come in many forms, and it doesn't take much to make a difference. Educational materials or information can be helpful. A 90-minute educational seminar given by a retirement counselor covering planning fundamentals, asset allocation, and risk-return characteristics of fund choices can positively impact participants' portfolios. Technology can provide participants with on-demand resources that are not tied to a rigid schedule.
Plan sponsors should look for service providers that can help their participants through education and advice. As Benjamin Franklin once said, “Without continual growth and progress, such words as improvement, achievement, and success have no meaning.”
Are you a plan sponsor that desires more education and service? Do you wish that your employer offered better information to help you make better 401K choices? Please leave a comment.