By Robert C. Lawton, AIF, CRPS, President, Lawton Retirement Plan Consultants, LLC
The media often use the term “Retirement Readiness” to describe whether retirement plan participants will be properly prepared for retirement at the end of their careers. There is no assurance that any 401k plan can place participants where they need to be when they wish to retire. Participation in these plans is voluntary, contribution levels are discretionary and investment management is the responsibility of the participant.
Both the employer and the employees share responsibility for preparing employees for retirement. Employer retirement readiness responsibilities include suggesting a way of participating and providing the tools participants need to construct a path to retirement that works for them. The following items are generally thought to be employer retirement readiness responsibilities:
Employer Retirement Readiness Responsibilities
Getting employees to participate:
- Automatic enrollment. To assure the participation of as many employees as possible, automatic enrollment in 401k plans has become a plan design standard.
- Default participant 401k contributions of at least 3%. It’s not enough to enroll employees. In order for them to have a fighting chance at funding their retirements, they have to make contributions. A default 3% contribution rate has also become an industry standard.
- Participant 401k contribution auto-escalation. Participants need to average an annual contribution rate of between 13% and 15% into their 401k accounts throughout their careers to fund a retirement at a standard of living roughly equal to the level they are enjoying just before retirement. Automatic 401k contribution escalation allows participants to reach an appropriate level of contributions in a more or less painless way over time.
- A matching contribution. To incent participants to contribute, most companies provide at least a 3% matching contribution. Typically, this contribution is expressed as 50% of the first 6% of employee contributions.
Helping employees manage their account balances:
- QDIA. A Qualified Default Investment Alternative allows an employer to deposit participant contributions (without participant direction) into an investment option that will provide a reasonable rate of return over time with a good chance of beating inflation.
- Investment education. Participants are going to need help managing their balances. Annual investment education sessions with the option of talking with an expert one-on-one when needed has become standard.
- Online tools. The 401k world is do-it-yourself. In order for participants to succeed, they need to have access to a set of online planning tools that are easy to learn and use and comprehensive enough to permit planning, forecasting, risk assessment and investment research.
You may notice that five out of the seven employer retirement readiness standards outlined above take the power to manage a 401k account out of a participant’s hands. A major portion of the employer retirement readiness responsibilities are to protect participants from themselves. The intent is to use participant inertia in ways that benefit participants instead of penalize them. As a result, 401k plans that do not offer participant loans or withdrawal options prior to retirement will score higher on the retirement readiness scale.
Retirement readiness is an evolving concept that provides a helpful way of gauging whether an employer is offering a 401k plan that allows for participants to achieve their retirement goals. Hopefully, your 401k plan compares favorably with the list shown above.
About the Author
Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton has over 30 years of retirement plan consulting and administration experience and has provided consulting services to many Fortune 500 companies including: Aon Hewitt, Apple Inc., AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Car Company, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others. Mr. Lawton may be contacted at (414) 828-4015 or firstname.lastname@example.org.
About Lawton Retirement Plan Consultants, LLC
Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Advisory (RIA) firm providing investment advisory, fiduciary compliance, employee education, vendor management and plan design services to 401(k) plan sponsors. The firm currently has contracts in place to provide consulting services on more than $400 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or email@example.com or visit the firm’s website at: http://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.
This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.