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Sidebar: Rebrand 401(k) for "wealth accumulation," not "retirement planning"
Many younger workers, especially Millennials born between 1979 and 1991, aren’t saving the recommended 10 percent to 15 percent of their income (including both employee and employer contributions), according to a report by Fidelity Investments, which manages retirement benefits.
“It is critical young workers realize that even the smallest increase to their monthly savings today could have a meaningful impact on their retirement paycheck down the road,” said James MacDonald, president of Workplace Investing at Fidelity.
Fidelity's analysis of how a 1 percent monthly increase in 401(k) contributions could translate into a larger monthly retirement paycheck found that the impact is greatest for younger individuals with the longest savings time horizon.
The table below shows rates of return for two 401(k) participants. Using two investment return rates—5.5 and 7.0 percent nominal returns—it illustrates both the current “cost” and the effect that a sustained 1 percent savings increase could have on each individual’s retirement paychecks. The “costs” of the additional $33 and $50 at ages 25 and 35, respectively, are assumed to grow along with the individuals’ salary at 1.5 percent per year until the participants’ retirement age of 67.
Impact of a 1% increase on estimated monthly retirement income
Initial Monthly “Cost” of 1% Savings Boost
Assumed Rate of Return
Potential Monthly Pretax Increase to Retirement Paycheck
Source: Fidelity Investments.
Fidelity also provides
a visual infographic about the effects of a 1 percent contribution increase.
Online guidance tools are available from most financial services firms that oversee 401(k) plans, allowing participants to estimate their likely retirement income based on their current income, expenses and assets. Retirement planners recommend that at least once a year 401(k) participants review their retirement savings and consider increasing their contribution level.
Rebrand 401(k) for 'Wealth Accumulation,' Not 'Retirement Planning'
Banish the phrase "retirement plan," or at least relegate it to the small print, urged Jack Towarnicky, a benefits attorney and advisors at Wills' national legal and research group, speaking at the 2013 SHRM Annual Conference last June in Chicago. He observed that 401(k) information meetings tend to draw older employees when they are told the session is about saving for retirement. Instead, brand your 401(k) as a lifetime financial instrument through which employees can take a "wealth accumulation journey," he suggested.
While Towarnicky would get rid of hardship withdrawals entirely, he encouraged allowing loans with reasonable, but not unfettered, access. "If participants know they can borrow from these funds when truly needed, they are more likely to increase their contributions," he noted.
Towarnicky recommended perennial automatic enrollment so that current employees who are nonparticipants are brought into the plan unless they opt out. "Do this every year," he suggested. "Make them affirmatively decide not to participate, if that's their intention."
He also favors automatic contribution escalation, rising incrementally up to 12 percent of pay. "Even if participants reject the escalated amount, and only a small number do, at least you've encouraged them to think about how much they need to be saving," Towarnicky noted.
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