Must Participants be Protected from Themselves?

Posted on Aug 03, 2012 by  in 401(k) Retirement Planning, Retirement Readiness

I just read an article that discusses the idea of “Protecting Participants from Themselves.” The article is good reading, but I wanted it to go a bit further with this subject.  It brings to mind some recent articles related to the “inadequacy of 401(k) plans” and the “fairness” of the 401(k) system.

Employers that sponsor 401(k) plans assuredly do not have a responsibility (fiduciary or otherwise) to protect participants from themselves.  Rather, the focus should be on how 401(k) plans can, and do, help participants help themselves.  This line of thought leads me to reflect on retirement readiness, the general theme of Retirement Voice and a subject near and dear to our hearts here at TSC. We developed the TSC 401(k) Health Check as a tool for our clients to use with their employee-participants to engage them in thinking about their retirement readiness and setting goals to help them achieve it. Our intention for this tool is for it to provide motivation for participants to take responsibility for their own retirement success.

EBRI has recently published an update on “Retirement Income Adequacy for Boomers and Gen Xers.” Among the observations in the study is one that should be no surprise: for successful retirement readiness people have to participate in their employer’s plan.  From 2003 to 2012 the percentage of retired households that lack adequate retirement income has declined by 5-8 percentage points (variance is by age group).  EBRI attributes this largely to adoption of automatic enrollment provisions in plans over that period of time.  The largest decline is among GenXers, which is a good trend.  The sooner younger participants get on the retirement bandwagon, the more opportunity they have to accumulate adequate retirement assets.

A take-away for me in these and other retirement plan statistics is that, at least in the second, third, and fourth income quartiles, in all age groups, more than half of the population is NOT at risk for inadequate retirement income. This does not sound to me like a system that is a failure.  There is work to do in the lowest quartile, but that is also the group that is best served by Social Security and for which Social Security was really intended.

Tax reform proposals to remove tax incentives for 401(k) plans or to dramatically restructure them by changing from deductions to credits would, according to EBRI’s analysis on the importance of being able to deduct retirement savings plan contributions, have the unintended consequence of causing those in lower income groups to reduce their savings.  Such proposals would put these groups at further risk of not having adequate retirement income and increase their reliance on Social Security.

The article discussing the fairness of the 401(k) system also highlights the value of the employer/plan sponsor in the voluntary retirement plan system. Research shows that we’re already saving “better” for retirement.  Indeed, according to EBRI, automatic deferrals with automatic increases and qualified default investment alternatives in employer-sponsored plans are causing more of today’s participants to save “earlier and invest more age-appropriately than ever before.”  Instead of “protecting participants from themselves” these techniques, coupled with education and increased publicity, make it easier for them to take an active role in their own retirement success.

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