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Encore
A blog about living in and planning for retirement

Employers: Most Workers Don’t Make Good Use of 401(k)s

Is a 401(k) retirement plan “adequate” if most workers who use it aren’t prepared for retirement?

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That’s the question raised by a new study from benefits consulting firm Towers Watson. The 401(k) system has come under a lot of criticism since the financial crisis hammered workers’ nest eggs. But the study, which polled about 370 large employers, suggests there may be a big gap between how managers and workers view the issue — and that managers don’t necessarily have a high opinion of the hoi polloi.

The discrepancy: Towers found about two thirds — 65% — of employers believed employees had ‘adequate’ retirement and investment planning resources. At the same time only 15% thought employees “made good use” of the resources and only 22% thought employees made “informed decisions” about retirement.

Ouch!

Of course, someone with a more charitable view of the employees might wish employers were asked a follow up question: If your plan is such a failure for the people it’s supposed to help, what exactly is the standard you’re using to declare it “adequate”?

There have been a slew of proposals about what to do to make 401(k)s better. Alicia Munnell, director of the Center for Retirement Research at Boston College, advanced some proposals of her own in a recent Encore post. Her suggestions included turning automatic enrollment and automatic escalation in the contribution rate into mandatory default settings for employees, and requiring that more default 401(k) investments be cheaper options, like indexed ETFs or indexed mutual funds. For more, read here.

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    • There are two problems with 401(k) accounts. First, people treat them as emergency reserves and withdraw money for any and all reasons. Second, people think because the market is rising and falling, they’re either getting rich or going to the poor house, so they do stupid things with their accounts (such as putting money into cash). Those who invest regularly and stay the course, and manage their portfolios prudently as retirement approaches never lose.

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    • Perhaps the root cause is lack of financial education? The vast majority of folks seem to have problems with basic personal finance. Even those that are not over spendign via credit cards and save money, do not have any idea about investing. A 401(k) program can be a very useful tool but you do need some understanding of investing.

About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.

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