Why we do such a lousy job with our 401(k)s

Jack VanDerhei, a fellow at the Employee Benefit Research Institute, which follows retirement issues closely, says the overall 401(k) saving picture is “very depressing.”

The average 401(k) plan balance of near-retirees aged between 60 and 65 is $187,000, which on its own may not be enough to fund some retirees’ financial needs in retirement. A recent EBRI study projects American retirees will fall far short of what they need by 2030 for medical and other expenses.

Some future retirees could avert this shortfall by saving another 5 percent of their compensation for the rest of their careers. But that solution is out of reach for some, such as low-income single women who would need to save an additional 25 percent of compensation, VanDerhei said.

Many Americans have not even gotten started, according to the EBRI. Some 50 million Americans, or 31 percent of workers age 21 and over, are enrolled in 401(k) plans.

One of the early casualties of subpar investing is the baby boomer generation, now approaching retirement, says Mike Benedict, a financial adviser at Weaver and Tidwell Financial Advisors in Fort Worth, Texas.

“Folks in the past were used to a pension funded by a company, but now we are seeing boomers retire and fund own retirement, and many of them are realizing they have not put enough money away. Part of it is the mentality and culture we had in the '60s and '70s, when people assumed that Social Security would handle retirement. And the 401(k) has only been around since the early '80s, and it’s a fairly new concept for this age bracket,” he said.

The underlying problem is a general lack of financial literacy, Benedict added. “We don’t do a good job of teaching in our schools and I think it’s something should be taught,” he said. “Our culture doesn’t reward saving. Instead it rewards consumption — you can see that in the houses we live in and the size of our cars.”

Pending legislation could reshape the 401(k), restoring much of the day-to-day decision-making to the employer and financial companies that administer the plans.

These proposed features would allow employers to enroll employees in their plans automatically, choose a default asset allocation, automatically rebalance their accounts and hire outside financial advisers to guide workers in their investment choices. Contribution rate escalators automatically will bump up an employee’s contribution rates each year.

An investment option known as a “life cycle” fund is growing in popularity. It automatically changes an employee’s blend of stock and bond funds as they approach retirement age. These funds relieve investors of the task of updating their portfolios to reflect their age and investment objectives.

The next frontier for retirement saving may be annuitization, which would allow retirees to turn over funds accumulated in their 401(k) plan in exchange for a regular monthly or annual payment for the rest of their life.

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“The last few years were spent focusing on how to get people to accumulate money in a 401(k), but now attention is turning to how get people to manage their spending,” Madrian said. “Traditional pensions gave you a check until you die, so the next frontier needs to be tackled, and it’s certainly on the minds of policy-makers, financial companies and insurance companies: the option to roll over your 401(k) into an annuity at retirement, and as they get economies of scale, companies can bring the cost of this down.”

Some of these 401(k) changes are dependent on the passage of federal pension legislation, but David Wray, president of the Profit sharing/401(k) Council of America, a nonprofit group, is optimistic and expects plan participation to grow. Wray says that as new company hires adopt 401(k) plans they will choose these automated techniques for the convenience and security they offer.

“We are projecting that 80 percent of plan participants will be in these managed funds,” Wray said. “The system is evolving and improving every year, and we are learning how to improve it and make it work. And in just a few months you could see a very different world for 401(k) plans and retirement in general.”

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