How to get a better retirement plan at work
Want to significantly increase the amount of retirement income you'll eventually receive? You might try asking your employer to make specific changes to your 401(k) plan. Why? Because employers can do a lot these days to improve the effectiveness of their 401(k) plans, but they often don't bother because they assume their employees don't care very much or they aren't paying attention.
It takes employers time and effort to analyze potential plan improvements, so if they think you don't care, they won't go to the trouble. On the other hand, if you and your co-workers show you are very concerned about retirement security, your employer might decide it's worth the effort to improve your retirement plan.
The key is to respectfully and intelligently ask for specific changes, instead of complain generally that you don't have a good retirement plan.
Don't know what to ask for? Here are a few ideas.
Low-cost investment funds
A lot of research is available showing that you'll accumulate thousands of dollars more for retirement if you invest in low-cost, index funds instead of actively managed funds with high fees. Your best bet is to invest in funds with management costs under 0.5% per year, or, using investment jargon, under "50 basis points." The lower the costs, the better. Some mutual funds have annual charges of just 0.1% per year, or 10 basis points.
Your 401(k) plan is now required to disclose the fees charged to your account, so you can easily determine if your funds are low-cost or high-cost. If you don't have funds with charges under 0.5% per year, ask your employer to offer index funds with costs under this threshold.
Projections of retirement income
Most 401(k) statements show only the amount of your account balance and possibly projections of the future value of your account balance if you continue contributing at your current savings rate. But these statements don't show how much monthly or annual retirement income your accounts might generate.
The problem with that is, most people aren't able to translate account balances into retirement income because they don't have the necessary analytical skills. In addition, many people underestimate how much savings it takes to generate a specific amount of retirement income. Behavioral scientists call this phenomenon the "illusion of wealth." As a result, many 401(k) plan participants aren't saving enough to meet their retirement goals.
Studies have demonstrated that people will increase their savings if they're provided with estimates of the amount of retirement income that their savings will generate. Such statements can help people determine if they're saving enough for retirement. The 2014 Retirement Confidence Survey from the Employee Benefit Research Institute (EBRI) shows that 85 percent of employees surveyed would find such statements "very useful" or "somewhat useful."
It really helps if these statements show a few different retirement ages, so you can realistically estimate when you can afford to retire. So, ask your employer to provide you and your fellow employees with more detailed statements to help you better determine if you're saving enough for retirement.
Retirement income programs
Most 401(k) plans don't offer much help with converting your savings into income upon retirement, which is one of their big flaws. A study from the Stanford Center on Longevity shows that providing institutionally priced retirement income solutions within employer-sponsored plans can increase your retirement paycheck by as much as 10 percent to 20 percent, compared to shopping on your own to buy retail products.
Employers could do their employees a big favor by implementing a program of retirement income in their 401(k) plans. In the EBRI study mentioned above, 88 percent of employees surveyed said they'd find it "very valuable" or "somewhat valuable" if their employer provided guidance on sustainable withdrawal amounts for retirement income.
An effective program would offer a few different methods of generating a retirement paycheck, including:
- installment payments to implement systematic withdrawals,
- institutionally priced annuity options, and
- period-certain payouts to enable delaying the start of your Social Security benefit, which is a smart strategy.
The program should also include a description of the pros and cons of each approach and make it easy to implement your decision. Why not ask your employer to look into this for you and your co-workers? It would go a long way toward helping you generate a retirement income that would last as long as you do.
Professionally managed investments
The typical 401(k) plan requires you to be your own portfolio manager. You need to decide how to allocate your savings among stocks, bonds, cash and other types of investments. You also need to discipline yourself to avoid panicking and selling when markets drop, as well as getting greedy and piling into stocks when markets rise.
Target-date funds, balanced funds and professionally managed accounts are all methods to help ordinary employees make asset allocation decisions and stick to them. If you don't have one or more of these investment options in your plan, ask for them.
Show that you're concerned about your retirement by making suggestions to your employer that demonstrate how informed you are and how much you care. Ask your friends at work to do the same. You've got nothing to lose -- and potentially much to gain.
