By Cyril Tuohy
Financial advisors need to fight employee retirement investment inertia by calling workers and reminding them to take maximum advantage of their employer-sponsored retirement plans. This is because automatic plan features are often not enough to secure a comfortable living, according to speakers at a recent industry event.
Personally calling employees who are not taking maximum advantage of their plans and telling them that they are leaving money on the table is the best approach, and email reminders are not enough, said financial advisor David S. Hinderstein.
“Retirement is a social issue,” he said.
There is no more effective illustration of this approach than showing the long-term results of employees who did it right — by investing early and often and taking full advantage of their employer's match — and those who didn’t do enough, said Hinderstein, president of Strategic Retirement Group, an independent retirement plan consultancy in White Plains, N.Y.
Hinderstein was one of several featured speakers who addressed the evolving role of advisors in breaking through plan-participant inertia. The speakers made their remarks at a recent dinner sponsored by Prudential.
Under the Pension Reform Act of 2006, companies started enrolling employees into company-sponsored retirement plans in an attempt to boost the workers' retirement savings. Despite the nudging, workers have been slow to respond.
According to the Center for Retirement Research at Boston College, 21 percent of eligible workers were still not participating in 401(k) plans in 2013. In addition, the percentage of plans with automatic enrollment features has remained steady at about 47 percent in 2012 and 2011.
Yet, many employees seem to know that they are their own worst enemies.
According to TIAA-CREF’s Ready to Retire Survey, 52 percent of the 1,000 respondents between the ages of 55 and 64 currently contributing to employer-sponsored retirement plans said they wished they had started saving for retirement sooner.
Of the respondents, 47 percent said they wished they had saved a greater portion of their paycheck, and 34 percent said they wished they had invested their retirement savings more aggressively.
Advisors say employees who want to enjoy a comfortable retirement need to defer double-digit percentages of income over an entire lifetime. The earlier they start, the better so their money has time to grow.
“Auto-enrollment is a good start but it’s not enough,” said Harry A. Dalessio, senior vice president of sales and strategic relationships with Prudential Retirement.
It’s important for advisors to remember that many employees have more pressing issues on their minds: paying off school loans, paying the rent on time, caring for an elderly family member, making ends meet and finding outpatient care for a sick family member.
That means advisors need to steer clear of retirement plan jargon and, instead, engage employees and “translate the paycheck” into future income.
For example, by showing how $250,000 in a 401(k) account at age 65 will convert to $10,000 a month in income for 25 years, advisors can help employees think about how to continue receiving a “paycheck” after they have left their employer.
Retirement plan advisor Jamie D. Greenleaf, general partner with Cafaro Greenleaf in Red Bank, N.J., said advisors need to translate the “illusion of wealth” — what employees see when they open their 401(k) statement — into monthly income.
A $250,000 fund balance isn’t going to mean $10,000 a month into your pocket after taxes, operating expenses and healthcare costs are deducted. Advisors need to collaborate and engage more with employees and talk to them about their future, she said.
In some ways, auto-enrollment features in retirement plans actually have contributed to retirement plan inertia. For many employees, signing up for automatic plan features often means they don’t look at their plans again.
Advisors can’t “set it and forget it” and assume that because employees are enrolled that they will agree to increase the percentage of their paycheck that goes toward their retirement account when they get a raise, Greenleaf said.
For all the discussion about how advisors can best engage employees, talking about automatic plan features within employer-sponsored retirement plans has helped stir more conversation around retirement savings, Hinderstein said.
The more employees, employers and advisors talk about how prepared employees are for retirement, the advisors said, the more likely workers are to overcome the inertia that has held back so many of them from simply getting started.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at firstname.lastname@example.org.
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