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| Your 401(k) Resource
August 2008 |
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Andrew Sweeny, Jr.
Vice President
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For more information about these topics, please contact
Andy Sweeny
at 513.745.0707.
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Greetings!
Thank you for your continued business. If you know of anyone that could benefit from my services, please feel free to forward this newsletter on to them.
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Is it Time to Re-Enroll Your Company's 401(k) Plan? A new tactic beginning to circulate through the retirement plan industry is re-enrolling participants in their 401(k) plan. The rationale is to improve the asset allocation of participants and increase their retirement readiness. As is often reported, once participants make an initial investment choice, they tend not to make any additional changes to their allocation. A side benefit of the re-enrollment is fiduciary protection for the plan committee. In a sense, the change will benefit participant investment allocation, and it will benefit fiduciaries regarding legal protections.
Asset allocation problems tend to pile up over the years since the participants' initial enrollment. These problems include:
- Younger employees concentrated in conservative investments.
- Participants diversify by investing equally in all funds in the plan.
- Two of every five participants in plans that offer employer stock have 20 percent or more of their assets in the company stock, according to a Hewitt Associates study.
- Older participant's portfolios are invested too aggressively.
The next step may be to re-enroll the whole plan to fix the bad investment decisions made in the past. It may seem radical, but if they are comfortable automatically enrolling new employees in the default investments, why not re-enroll all existing employees to the same options? The participants will have the ability to stick with their current choices by opting out of the re-enrollment, but many will go with the new investments and probably will be better off in the long run. Of course, you would want to check with your ERISA attorney for any possible fiduciary risk to the company and trustees.
For more details on this re-enrollment strategy, please see the full story, by Scott Thole with HORAN. |
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Participants Fall Short of Savings Need in Retirement
According to new research from Hewitt Associates, less than one in five (19%) employees who participate in their companies' 401(k) plans will be able to meet 100% of their estimated needs in retirement.
When factoring in inflation and increases in medical costs, Hewitt predicts employees will need to replace, on average,126% of their final pay at retirement, the company said in a press release. This percentage is significantly more than the traditional expert estimates of 70% to 90% pay replacement.
According to research results, the situation is more serious for employees who do not contribute to their 401(k) plans. While employees who contribute an average of 8% of pay to their plan can replace 96% of their pre-retirement income at age 65, that number drops to 54% for those employees who do not contribute. Employees who have a pension plan may expect to replace just 62% of their income at retirement if they do not contribute to their 401(k) plan, Hewitt said.
The fact that people are living longer is making the retirement savings picture worse. Hewitt said assuming employees need to prepare for a longer life span - approximately 10 years beyond the expected lifetime of 84 years old for someone age 65 - increases the average shortfall by 80%. See full story, located at PlanSponsor.com, to read about strategies that can help employees boost their retirement savings. (free registration required) |
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Automatic 401(k) Provisions Are Having Desired Effect
Nearly two years after the Pension Protection Act (PPA) of 2006 became law, the legislation's "automatic" provisions -- automatically enrolling new workers in their employers' 401k plans, automatically putting their contributions into age appropriate "default" investments, and automatically increasing their annual contributions -- are beginning to have the desired effect, according to speakers at the nonpartisan Employee Benefit Research Institute's (EBRI) semi-annual policy forum.
A summary of the policy forum discussion appears in the July 2008 EBRI Notes. Speakers at the policy forum, held in May in Washington, made the following points:
- Automatic enrollment can nearly double participation in defined contribution plans, such as 401ks.
- An increasing number of employers, especially large employers, are adopting automatic enrollment.
- The "auto" features of the PPA are likely to have a very significant positive impact in generating additional retirement savings for many workers, especially for low-income workers.
- Eliminating the company match in a 401k plan seems to have only a modest impact on automatic enrollment.
- Workers appear to be much more willing to accept automatic enrollment today than they were in the 1990s.
See full story, located at 401khelpcenter.com. |
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Target-Date Funds and "Glideance" Counseling
While the positive aspects of target date funds have been well publicized, plan fiduciaries unknowingly may be gliding into an area of risk not yet considered. If a participant in a target date fund were going to bring legal action against a plan sponsor for an inadequate accumulation of their savings account, what would the likely culprit be? Under performing investments that make up the target date funds? Maybe. Unreasonable costs? Perhaps the portfolio was made up of all proprietary funds that had higher than appropriate expenses.
Consider the significant difference in the stock/bond mix of portfolios offered by Alliance Bernstein and those of Wells Fargo. One approach is to be virtually out of equities by retirement date. The other says an individual will live on average 22 years after the target retirement, and needs equities to keep pace with inflation. A compelling argument can be made for both strategies, so it is not a question of good vs. bad or right and wrong. But a 401k plan committee needs to know which side it is on, and why, or the potential for risk may be significant. Managing this risk is a matter of informed decision making that is well documented.
The question would be posed to the plan sponsor: "How were these target date funds selected? You should have seen this fund was too aggressive, or not aggressive enough in comparison to similar funds." If the investment committee of the plan sponsor documented a prudent process of evaluating alternative strategies, with a decision supported by due diligence in the analysis, either the more aggressive or less aggressive approach could be easily defended. If no such process exists, there is, in my opinion, considerable potential liability to the committee for making an uninformed decision. See full story, located at 401khelpcenter.com. |
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Questions or Comments?
Do you have a question or topic you would like addressed in our next issue?
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Horan Securities, Inc., doing business since 1996.
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