The hurdles races are some of the most interesting events to watch at a track meet. Highly trained sprinters not only have to run fast but also must jump over the obstacles at set distances to win the race. The athletes could stumble at any time and never finish close to their goal. It is the same with Defined Contribution Plans participants.
Hurdle #1: The Plan OfferingDoes your employer even offer a Defined Contribution Plan (DCP)? This could be a 403(b), 457 or the 401(k), which is the most common. Robert Grossman, reported in HR Magazine April 2010, only 63% of companies offered a DCP. Some companies have dropped their plans with the recent economic environment. Perhaps 70% of workers are eligible to participate in a plan. Therefore 30% of individuals do not have this option and they LOSE at the first hurdle. That leaves 70% in the race to adequately fund retirement.
Hurdle #2: Employee ParticipationIt is well known that higher income and older employees have a higher participation rate then low income and younger employees. It has been estimated that 70% of eligible employees participate in the 401(k) offering. That means there are 49% still in the running for meaningful retirement income.
Hurdle #3: Adequate contributionsStudy after study indicates that employees are not contributing enough and not starting early enough for a meaningful retirement income. Studies suggest that employees should save 10% or more a year to have adequate income in retirement. The average is less than 6%. 67% will be left short and not have adequate income in retirement. That leaves 18% in the race.
Hurdle #4: Poor investment returnsThe primary reason is poor investment decisions on their part. They do not understand asset allocation, they try to time the market, they to not understand the amount of risk in their portfolio and as a result fail to have adequate investment return. These mistakes are not made in traditional pension plans because they are professionally managed. 80% of investors under perform. That leaves 3 to 4% with a chance for good retirement income.
The last hurdle is poor plan design by the employer. It is the responsibility of the employer for having a plan with low fees and an adequate selection of investment options. Based on analysis by BrightScope, few 401k plans (and even fewer 403b plans) are top performers. The vast majority could be improved which means that only 1-2% of all American workers can expect adequate retirement income from their defined contribution plan during retirement.
If you participate in one of the larger DC plans you can view the strengths and weakness of your plan online for free. Unfortunately, those plans with less than 100 people are not included.
To improve a DCP and future retirement income for the employees, employers should use the services of a plan fiduciary. These individuals are advocates for the plan and the participants. They provide actual investment advice and not just education. They often use model portfolios so that employees can understand the level of risk in their plan. One of the goals of the fiduciary is decreasing plan costs and is very consistent with new DOL regulations. The financial services industry has been “gutting” the participant returns with high and often hidden fees for years as reported in the media such as on CNN. The use of an investment fiduciary by DC plans is the right change at the right time.
The retirement of American workers is too important. Changes need to be made and made now so that more workers finish the retirement income race without tripping over the DCP hurdles.