By Robert C. Lawton, AIF, CRPS, President, Lawton Retirement Plan Consultants, LLC
Participants can be their own worst enemies. Shlomo Benartzi (a leading authority on behavioral finance) has identified the following three retirement readiness obstacles that 401k plan participants need to overcome on the road to retirement readiness:
Retirement Readiness Obstacles
One of the biggest retirement readiness obstacles is employee inertia. The incorporation of “auto” features (auto-enrollment, auto-escalation and auto re-enrollment) into 401k plans along with the addition of professionally managed investment options, like target date funds, can successfully address employee inertia. Recordkeeper’s Vanguard and The Newport Group report that approximately 1/3 of the 401k plans they administer have auto features. Experts believe that within 3 to 5 years the majority of 401k plans will adopt these plan design elements.
2. Loss aversion
Loss aversion may be characterized as valuing the avoidance of loss over the accrual of gains. In other words, participants are more afraid of losing money than they are of not having enough money (as a result of investing too conservatively). In order to overcome the scariest of all the retirement readiness obstacles, plan sponsors need to offer target date funds. Most experts believe that 75% to 85% of all plan participants should be invested in target date funds. Left on their own, participants tend to invest too conservatively to keep pace with inflation, or they are prone to attempt to market time, resulting in significant losses.
Model or lifestyle portfolio’s aren’t a solution here since employee inertia comes into play. Both of these types of professionally managed investment options require a positive employee election to move to more conservative options over time. Target date funds do not require any employee interaction since the investment manager adjusts the risk level of the portfolio as time goes by.
Myopia is the hardest of all retirement readiness obstacles to overcome. Participants have a tendency to focus on immediate, short-term goals rather than planning for their future. Many participants view the process of saving as difficult and not worthwhile. For example, they may feel that they will be too old to ever enjoy their savings, or they may believe they will pass away before they are able to retire. Regardless of the reason, participants are not eager to fund a future they have a difficult time envisioning. Employee education is the only effective tool to fight myopia.
Plan sponsors who adopt these plan design, investment and employee education elements have a much better chance of seeing their participants achieve retirement readiness.
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 email@example.com.
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 firstname.lastname@example.org 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.