Employers have plenty of responsibility in helping employees understand and save enough in their 401(k)s.
“Employer anxiety about offering you a 401(k) plan is rising rapidly, and for potentially good – and expensive – reasons,” writes Suzanne Woolley for Employee Benefit Adviser.
Here are three important factors your clients should understand about their employee 401(k)s.
- Risk of Litigation
“Class-action lawyers are targeting a wider variety of alleged breaches of fiduciary duty in retirement offerings and suing a broader range of entities, including college and university 403(b) plans,” Woolley writes.
A Fidelity survey of small and midsize plans shows 38 percent are concerned about possible litigation, compared to 24 percent a year ago.
“This year was the first time it came in as a top reason plan sponsors are turning to retirement advisers,” Woolley writes. “Almost 70 percent of plans cited the willingness of an adviser to take on a formal fiduciary role as important. An adviser change may come in tandem with the winnowing of a confusing thicket of investment options and a switch to lower-priced versions of mutual funds.”
“For nearly 30 years, the 401(k) plan industry wasn’t legally required to explain exactly how much it was charging investors,” Tony Robbins and Tom Zgainer write for CNBC. “Only in 2012 did the government finally force providers to make detailed disclosures of how much they were extracting.” But the resulting disclosures are complicated.
“Instead of digging through the fine print, most plan participants simply trust that their employers are looking out for them,” Robbins and Zgainer write. “Employers need to wake up and take their role as 401(k) plan sponsors more seriously. It’s in their power to dramatically impact the future quality of life for their employees.”
- Encouraging savings
“Employees have been asking their employers to help them stash more money in their 401(k) savings plans, seeking more automated savings features,” writes Darla Mercado in the Detroit Free Press.
Research from T. Rowe Price shows 29 percent of employers annual enrolled their employees at a savings rate of 6 percent at the end of last year, compared to 17 percent doing so in 2011.
“The Pension Protection Act of 2006 established standards for a minimum savings amount — 3 percent — for plans that automatically enroll participants,” Mercado writes. Compare that to the 15 percent T. Rowe Price recommends employees save.
To make up the difference, employers are encouraging savings with financial wellness programs. They should also be thinking about easing default 401(k) savings rate higher as employees stay with the company.
“Savers could reach (15 percent) over a period of five years,” Mercado writes, “starting off with a 5 percent deferral and raising it by 2 percentage points each year.”