By Cyril Tuohy
Retirement plan advisor Jamie D. Greenleaf said the past several years have taught her some important lessons in the power of instant gratification.
Ever since the passage of the Pension Protection Act of 2006, she has watched as more employees gradually signed up to participate in employer-sponsored retirement plans — which has been all for the good as millions of Americans started setting money aside for the future.
Over the years, though, Greenleaf has noticed a trend that no one really expected: Employees have opted out of contributing to an employer-sponsored plan at roughly the same rate, whether they set aside 3 percent or 6 percent of salary.
The reason, Greenleaf said, is because employees need to see more progress sooner in their account balances.
“It's about instant gratification,” Greenleaf told InsuranceNewsNet. “Long term, if we have to save for retirement and we only have $50 (in increases a month), it’s not enough to reach our goal.”
A statement that shows assets growing by a “meaningful amount” would go a long way toward convincing an employee about the value of an employer-sponsored retirement plan.
What would be a “meaningful amount”? No one really knows, but the maximum allowed by law is $17,500 in 2014 for employees age 50 and under. An account balance that grows by $17,500 plus interest would be instantly meaningful.
“Ideally, you want to get people at the maximum allowable by law,” said Greenleaf, who is principal and lead consultant with Cafaro Greenleaf in Red Bank, N.J.
But who puts that kind of money away? Almost no one, at least not the vast majority of salaried or hourly employees with access to a 401(k) plan.
Surveys show many employees in sponsored plans stash away well under 10 percent of salary, and that stubbornly high numbers of workers walk away from “free money” because they don’t take advantage of the employer match.
As all advisors know, the magic of compound interest is greatest during the last years of an employee’s working life, where a fat account value grows by a “meaningful amount” from one month to the next without the employee even having to add to principal.
To get there, of course, the employee must have diligently stashed away $50 or $100 a month for the previous 40 years and maximized the employer matching contribution.
At the beginning, these “super savers” spent years looking at account balances that never seemed to grow. They also were likely to be the very employees who understood that compounding doesn’t make itself heard until much later in life.
Repurposing account statements in a way to show investors how their invested sums have grown over the past year would help.
Greenleaf and Jeffrey H. Snyder, vice president and senior consultant with Cammack Retirement Group in New York, said the Pension Protection Act of 2006 did a good job of adding millions of employees to the employer-sponsored defined contribution retirement plan rolls. Ironically, though, automatic enrollment features have given some employees the mistaken impression that their retirements are being taken care of through the employer, the advisors said.
Employees who are automatically enrolled, offered a company match, and who agree to auto escalation shouldn’t think that an autopilot is going to fly them to their retirement destination in good shape. For one thing, most contribution percentages set aside by employees are nowhere near enough to fund comfortable retirements. From the start, employees have to take advantage of every opportunity the employer plan gives them, and more.
“You have to bring people into the plan and get them to act,” Snyder said.
Greenleaf and Snyder said it’s time for employer-sponsored plans to take the next step, which is to lift the caps on automatic escalation features and raise the default amounts set aside through automatic enrollment to prevent inertia and backsliding.
Unlike health insurance, which is mandatory, there’s no law requiring employees to set aside funds for retirement. Because retirement is a benefit enjoyed so far down the road, the tendency is to put it off into the future, by which time it’s usually too late.
Snyder said he wants to see the retirement-plan industry move beyond treating retirement benefits in a silo and approach employer-sponsored retirement plans through the eyes of “shared ownership,” to the benefit of the employer and the employee.
“We need to think about things more broadly,” he said.
Cyril Tuohy </em>is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at email@example.com.
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