7 of the Biggest 401k Problems – And Their Solutions
It seems no matter where you turn, there are people critical of America’s retirement system and the 401k plan specifically. While many believe the current system is far from perfect, they also question whether it’s really broke. For all the apparent problems, there also exist several opportunities that await forward thinking regulators and legislators, experienced practitioners and creative thought leaders. FiduciaryNews.com put the question of problems and opportunities to several of those most familiar with getting America’s retirement system to work.
#1) Lack of Saving: The most common culprit of the lack of retirement readiness is the lack of saving. Jeff S. Vollmer, founder of Hyde Park Wealth Management in Cincinnati, Ohio, sees a big problem will occur when “Boomers retiring at a rate of roughly 10k people per day realize the downside to insufficient saving as employment income dissipates.” To stave off this problem, he says advisers should “coach clients to remain in the work force on a part time basis while completing a soft retirement. Gets them out of career jobs, frees up personal time, and keeps an income stream available to them.”
Steven D. Brett, President of Marcum Financial Services, LLC in Melville, New York, says, “Employees don’t contribute enough – The solution lies within a combination of education, plan features, employer communication, and funding. Service providers need to be empowered by the plan sponsors to fully engage participants in the importance and process of saving for retirement.”
#2) Financial Illiteracy: Financial literacy is often cited as a major problem when it comes to our retirement system. Jamie Hopkins, assistant professor of taxation in the Retirement Income Program at The American College in Bryn Mawr, Pa., and associate director of the New York Life Center for Retirement Income, says “The biggest problem facing the retirement plan industry is a lack of knowledge by plan participants and prospective clients. Many plan participants, whether they take part in a 401k or profit-sharing plan, do not understand all of the features of their employee sponsored retirement plan. This lack of understanding decreases participation in the plan and leads to lower retirement preparedness by the employees. Auto-enrollment and auto-escalation has helped with 401k plan participants even without increasing their understanding of the plan. More education by employers needs to be encouraged to promote understanding of the retirement plan so that employees can maximize their retirement savings opportunities.”
Dan McElwee, Executive Vice President of Ventura Wealth Management in the Greater New York City Area, says, “The single largest problem that faces the retirement plan industry is the lack of end education to the consumer. Investments, and more importantly, retirement plans, are complicated topics. Advisors need to be sure that those that are investing in plans that they supervise understand financial goals, the fees they are paying, and risk/return parameters. For too long, retirement plans have been set up as a passive employee benefit. Having a proactive education program (not just a website or 800 number) is key to having an educated workforce invest in a retirement plan.”
“Retirement savers have not been properly educated on the corrosive effect of credit card/revolving consumer debt,” says Vollmer. He further adds, “Meanwhile, consumers have been trained to utilize such debt to enhance their current lifestyle, to the detriment of their futures.” He predicts “advisors who can provide their retirement plan clients with classes on budgeting, saving and deleveraging will find an increasing voice in the years ahead.”
#3) Everything’s Too Confusing: Compounding both of the above problems is the fact that retirement plans and interacting with them can be confusing for the typical employee. Daniel Sentell, Director of Communications at Broad Financial in Monsey, New York, says “People tend to be inert, and any reason not to look into starting something new will be jumped upon. This is especially true for retirement plans. There is so much information and marketing out there regarding different kinds of plans, that it makes a potential investor throw up his/her hands in exasperation and leave it for ‘next’ Sunday.” He believes pitching “turn-key plans and set-up” might help fix this problem.
“In addition to encouraging participants to start saving early and invest properly,” says Scott Price, Principal at Bond Beebe Accountants near Washington, D.C., “plan sponsors and fiduciaries need to continue to help participants understand the difference between investment options, with a focus on the various associated costs. More work needs to be done to clarify and simplify the information provided to participants.”
Vollmer sees this confusion as a problem surfacing as a result of “advisors not drawing sufficient link between long-term financial objectives and these enigmatic capital pools into which people are deferring. Thus, most savers have no idea as to whether they’re on the proper path or not.” To address this, he says a “more intensive retirement planning analyses for individual k-plan participants would draw a link between their goals and their savings rate and risk allocations.”
Much of this confusion can be attributed to regulators and politicians. “Public policy uncertainties are a major concern for the industry,” says Hopkins. Adds the educator, “With potential changes to 401ks, the addition of MyRAs, proposed caps on IRAs, and the possible addition of required minimum distributions to ROTH IRAs during the lifetime of the owner, considerable changes could take place that would flip retirement plans and planning on its head. While all of these changes are unlikely, it is smart to plan ahead of time.
#4) Plan Sponsors Still Don’t Understand Fees: It’s not just participants who are confused. Even today, nearly two years after the DOL required full fee disclosure in 401k plans, many plan sponsors still don’t know the true nature of the fees they pay. Brett says, “Plan sponsors for the most part still don’t understand fees, cannot compare them across providers, and don’t understand the value of services they are receiving for fees paid – Fee disclosure needs to be streamlined more thoroughly and plan providers need to be held to a uniform standard for charging fees.”
#5) Market Uncertainty: In addition, and this was especially acute during the 2008/09 market downturn, “The wild gyrations of the market turn people off from investing,” as Sentell puts it. He says, “Nobody wants to invest in a losing proposition, and the constant ‘if it bleeds, it reads’ financial reporting reinforces investor beliefs that the market is inherently unstable.” He thinks this problem can be fixed by incorporating “diverse assets in retirement plans that go beyond market products.” He also believes “Self-directed providers can enable financial advisors to give their clients the tools they need to go beyond Wall Street. This gives clients the sense of control.”
#6) Not Enough Financial Planners: One problem that’s becoming more apparent is that there are not enough financial planners. Steven K Lewis of L&A Capital Advisors, LLC in Raleigh, North Carolina says, “Participants have nobody to go to if they need help in managing their holdings.”
“The financial planning industry is struggling to attract new planners,” says Hopkins. “There are just not enough talented and young employees joining the ranks. While this has not yet become a major problem, in twenty years this will be a huge issue. Financial service companies need to go back to the drawing board and figure out what exactly it takes to attract a new generation of advisors. The current strategies are not working and a new approach is needed. The current generation of college graduates have different desires and career goals than previous generations. Recruiting in the industry needs to focus on the impact that this generation wants to make.”
#7) Lack of a Fiduciary Standard: Finally, and this might be the one problem that, when solved, can best solve all the others, there needs to be a resolution of the fiduciary issue. “This needs to be settled and clarified once and for all,” says Brett, who adds, “It needs to be abundantly clear who is a fiduciary to a plan and who is not as well as what a providers role and responsibilities to a plan are.”
There you have it. Seven 401k problems and their solutions. If it seems like something is missing, you’re right. Stay tuned next week.
Interested in learning more about this and other important topics confronting 401k fiduciaries? Explore Mr. Carosa’s book 401(k) Fiduciary Solutions and discover how to solve those hidden traps that often pop up in 401k plans.
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