Preparing Participants to Retire

Education improves understanding, and that obviously applies to retirement plans.

A recent survey of plan participants found that while they are satisfied with their 401(k), most lack an understanding of basic investment concepts. This likely contributes to lower plan participation and less successful retirement outcomes. For retirement plan sponsors and advisors, it should be clear that participants need help.

The 2019 Schwab 401(k) Participant Study illustrates that participants have questions that are not being answered. When respondents were asked what they need help with, results were mixed. 41% said they needed help determining an age when they could afford to retire; 40% wanted help calculating how much they needed to save, and 37% were seeking help choosing investments.

It seems plan participants need a better grasp of basic retirement planning options to truly understand how 401(k)s work and how they can be engineered to meet their financial goals and make the most of their contributions. The survey shows that 52% of participants would like to meet with a professional to get help understanding their financial situation.

This is particularly important as 401(k)s and other defined contribution plans are by far the largest anticipated source of retirement income for plan participants. In fact, nearly six in ten survey respondents expect it to be their most important source of income in retirement. This is the primary vehicle they use to fund their retirement and it’s the primary vehicle they plan on drawing from to provide income in retirement. Personal savings is viewed as the third largest source of income with Social Security ranked second.

Additionally, while plan participants place the 401(k) on a pedestal, it still remains underutilized. The average 401(k) participant under 50 contributes less than $8,800 per year to his or her account; for those 50 or over the average is $9,100. In both cases this equates to a median deferral rate of just 9% of personal income, certainly less than most financial professionals recommend for building a secure retirement income.

On top of not investing enough, the study shows that most individuals are unprepared to make decisions or take action to optimize their 401(k) plans and are leaving tax-efficiency on the table. Nearly half of all 401(k) participants chose to leave their 401(k) accounts completely untouched within the past year, meaning few increased their contribution. This is where proper education and guidance can influence how plan participants engage with their retirement plans.

The study finds that plan participants are fairly realistic about the connection between savings behavior today and retirement income tomorrow. However, plan participants are overly concerned with checking on their account balances and do not focus enough on how to convert their balance into income. This directly influences their retirement outlook; 50% are only somewhat confident that they will hit their target retirement income. Further guidance and knowing how current contribution rates stack up against future income replacement would cause plan participants to set more money aside.
The simple conclusion is that the more participants know, the more comfortable they will be utilizing the plan. Now is a great time to speak with plan sponsors about employee education. Educating plan participants will not only increase participation and plan assets but it will also solidify your relationship with the plan sponsor. You might even consider offering the education service to plans you are not currently the advisor for. This might open door to unexpected business.

As always, contact our office if you would like to us to run a list of plans in your area. We are also available to benchmark existing plans.