Despite widespread satisfaction with 401(k) plans from older participants, younger people, especially millennials, say plans are cumbersome, archaic, and confusing, new studies find.
Betterment and The TransAmerica Center For Retirement Studies surveyed participants as both firms seek ways to get the 401(k) option back on track for Americans aged 35 and under.
Millennials want to embrace their 401(k) plans – most consider them to be the surest path towards a decent retirement, according to the TransAmerica study.
But there is plenty the financial services industry can do to upgrade the retirement plan experience for the under-35 set.
InsuranceNewsNet.com contacted several retirement experts and asked them what they would do to improve the 401(k) retirement plan experience for younger career professionals. Here’s what they said:
1. It starts with plan security. In a September 2016 study, Willis Towers Watson reported that the number of millennials “willing to pay a higher amount for a guaranteed retirement” from their employer was on the rise. That number increased from 42 percent in 2009 to 59 percent in 2016. Employees of all generations, including millennials, are feeling vulnerable about their long-term security.
“Employees young and old actually have a strong desire for more retirement security and are willing to give up pay to get more guarantees or a larger retirement benefit. Interestingly, employees seem to be saying they have enough health coverage now and are reluctant to pay more,” said Steve Nyce, senior economist at Willis Towers Watson, located in Arlington, Va.
“Employees young and old actually have a strong desire for more retirement security and are willing to give up pay to get more guarantees or a larger retirement benefit. Interestingly, employees seem to be saying they have enough health coverage now and are reluctant to pay more.”
2. Offer more investment options. The best way to improve the 401(k) is to have more offers besides mutual funds, experts say. “Take the example of self-directed IRAs. They offer real estate, precious metals. real estate loans, the ability to purchase individual stocks or bonds, and many more attractive offers,” said Collin Plume, president of Noble Gold Investments in Pasadena, Calif.
“There’s no reason that today's consumer should be limited to the mutual funds that their employer has available. In today's inflated paper markets investors want the flexibility to control their investments and not be tied down to the conventional stock market options.”
3. Customize plan offerings. 401(k) plan providers would do well to “nudge” employee behavior toward their best interests, especially toward the default investment plan selection.
“I had a client whose employer had defaulted her into a very low-yield bond fund, and since she didn't have the employee education mentioned above, it had been four years. The problem? The employee was just 26 when this started.
She missed out on a great period of returns in the equities markets because of the default option,” noted Ryan Frailich, a financial coach and planner with Deliberate Finances, a financial planning firm based in New Orleans.
While target date funds aren't perfect, they're a great solution as a default option to get a diversified portfolio with an appropriate measure of risk based on retirement age.
“Had my client been defaulted into a target date fund, her money would've grown at three-to-four times the rate it did in the bond fund during that period,” Frailich added.
4. Embrace technology. In the Willis Towers Watson study, six in 10 millennials wanted digital access to their 401(k) plans, including the ability to change their investments. That’s just one of many examples of why technology is a game changer for younger investors, and plan sponsors should be quick to climb on board, analysts say. Start with a live, internal FAQ session for plan participants.
“This is where employees can post questions and the experts can answer via a televised live session on the employee’s computer,” advised Winnie Sun, founder of Sun Group WP, in Irvine, Calif. “More than likely, many employees have similar questions so this allows them to ask efficiently, and the answers will likely help others.”
Since some staffers may be offsite or tied up in a meeting, the idea is to make the advice and accessibility as easy as Facebook.
“This doesn’t include investment advice questions which should be handled on a one-on-one basis,” Sun added. “A representative assigned to the company should be able to field ongoing questions post meeting. This also gives the employer an idea of how engaged their employees are and whether or not the 401k provider/advisor is providing adequate value.”
5. “Personalize” the 401k Experience. Along with any good investment account is good advice, retirement experts say.
“Millennials want advice that is personalized to them, not canned advice that feels like calling a 1-900 number for intimacy,” said Daniel Grote, a financial planner with Latitude Financial Group in Denver.
Consequently, a greater number of companies are offering self-directed brokerage windows on their plans. An unintended bi-product of this is that many large company plans allow participants to have their financial advisor added to the plan for direct supervision of the assets and personalized advice.
“Unfortunately, this is a slow evolution in part because it's not necessarily been done by design and the financial advice industry is still largely unaware of the intricacies of setting these up,” Grote said.
By and large, younger career professions are okay with their 401k plans, but they do see plenty of room for improvement. For plan sponsors, and the companies that partner with them on 401(k) programs, that should be a wake-up call from the next of retirement savers – who expect a better plan experience, and aren’t shy about saying so.
Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at [email protected]
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