On the Web
October 9, 2012
401(k) Education Missing A Target
Dennis Ackley says he doesn’t get a lot of holiday cards from the mutual fund industry.
The Kansas City, Missouri, consultant has become a well-known critic of the 401(k) materials that funds provide to employers, which usually leave the complex job of retirement planning to the workers to figure out. When speaking to a room full of 401(k) plan sponsors, he has a unique way of getting his point across. Ackley hands out sheets of paper similar to what’s shown here and asks them to wad them up and throw them at the target.
The problem – for the plan sponsors in the audience – is that Ackley doesn’t give them a target.
“Most of them are just kind of befuddled by the whole thing.” Befuddlement, he tells is audience, “is what young employees experience sitting in a 401(k) meeting.”
Ackley believes 401(k) education usually lacks one basic piece of information required for employees to get on the right track for retirement. The first step, he said, “is get a target.”
To establish personal targets for each employee, Ackley said plan sponsors might help them set goals for the total assets they wish to save by the time they retire or for how much income they can expect their 401(k) retirement savings to generate.
In a recent employer survey by the benefits consulting firm Callan Associates, 42 percent said that they gave employees retirement-income projections. And that figure sounds high, perhaps because Callan surveys primarily large companies.
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“Ackley said plan sponsors might help them set goals for the total assets they wish to save by the time they retire or for how much income they can expect their 401(k) retirement savings to generate.”
I have a difficulty with the above since what are the returns used? Are they based on a past history from the age of the dinosaurs?? You certainly cannot give them income projections without dealing with real life. Every portfolio allocation starts with risk. The risk of loss. Most younger people will have somewhere around a 60% to 80% exposure of half their funds once or twice a decade simply due to far messier economics. Unless the fiduciary clearly explains risks and rewards, there has been a breach of duty.
Errold F Moody Jr
A point well taken. It’s sort of like playing shortstop – your efficiency improves significantly if you open your eyes while fielding. However, it’s important to provide some guidance on how to pick a target – dollars at retirement isn’t a very good guide. A better guide is what multiple of final salary a (young) person will need to replace a desired portion of their salary. Better yet would be if the target were stated in terms of annuity income (in inflation-adjusted) dollars @ retirement and that information was available as part of the information participants receive.
“Ackley said plan sponsors might help them set goals for the total assets they wish to save by the time they retire or for how much income they can expect their 401(k) retirement savings to generate.”
Shouldn’t the goal be how much retirement income the plan participant aspires to generate from his 401(k) savings plan?
Thank you for your comments. I agree: simplified explanations of complicated processes lack specificity. And certainly, financially astute, academically sound retirement and investment calculations are needed and beneficial. But maybe they are not for certain workers early in their careers.
All I’m saying is that sophisticated techniques are not providing most Americans with a personally meaningful, realistic retirement target that they are personally motivated to reach.
After decades of telling workers about replacement ratios, gap analysis and other robust math calculations, the vast majority of Americans still have no idea – they cannot even guess – how much money their retirement will cost or how much they will need in their accounts to fund the retirement income they will want.
Human beings do not accomplish difficult tasks – such as running marathons, earning college degrees, or saving a substantial part of their pay – unless they have a personal understanding of the challenge and the personal motivation to reach it.
If voluntary 401(k) plans are going to become ‘America’s retirement plans’ then they must offer all Americans a chance to succeed – not just the mathematically fluent.
Unfortunately, many American’s are math-challenged. Telling them about ratios, multiples of future pay, and most other numbers-based ‘solutions’ – no matter how precise – just isn’t meaningful to them.
When you see restaurant bills showing the dollar amounts for recommended gratuities and retail stores providing signs showing the new prices resulting from the ‘35% off sale,’ you’re seeing communication directed at the math-challenged. This is the kind of communication the retirement industry needs to invent. It’s not intended to replace sophisticated financial analysis, but to help these Americans discover a realistic target…before age 30, not at 60. Over time, these workers will likely want to add precision to their target and investments. But without a personally meaningful, realistic target early in their careers, their chance of having a financially successful retirement is greatly reduced.
Dennis Ackley
“Better yet would be if the target were stated in terms of annuity income (in inflation-adjusted) dollars @ retirement and that information was available as part of the information participants receive.”
Even better yet would be the participant’s goal or target level of income in retirement and the expected level of retirement income, given the participant’s asset allocation and savings rate. All of these income targets would be in terms of a real annuity priced for the participant by gender and age in the expected retirement year.