The prevalence of private-sector defined benefit (DB) pension plans has declined markedly over the past few decades, leading to a rise in the importance of 401(k)s and other defined contribution (DC) plans as retirement saving tools for American workers. In fact, $7.0 trillion were held in 401(k)s and other DC plans at the end of the second quarter of 2016 (most current data available), accounting for more than a quarter (29 percent) of all U.S. retirement assets and almost one-tenth of Americans’ aggregate financial assets.
401(k) plans provide a handful of tax advantages and enable workers to save for retirement more efficiently. These vehicles are also one of the main avenues through which Americans participate in the stock market, something that can help workers generate substantial growth in their assets over time. Indeed, new data from the Employee Benefit Research Institute (EBRI) showed that the average 401(k) account balance for younger (25-34), less-tenured (1-4 years) workers surged by 91.8 percent in just the past two years. Even older (55-64) employees with longer-tenures (20-29 years) whose total account values are less sensitive to contributions still experienced a healthy 15.0 percent increase on average since January 2015.
Another 401(k)-related benefit is that many of the employers sponsoring these DC plans will also match participants’ contributions up to a certain ceiling, thereby providing a significant boost to each worker’s rate of saving. In fact, employers accounted for roughly a third of all funds contributed to 401(k) plans in 2014, according to ICI data. Too many participants, though, do not regularly contribute enough to take full advantage of the matching contribution their employer may offer. What is worse is that some participants will also tap into their 401(k) assets prior to retirement through loans and early withdrawals, activities that can severely hinder the growth and ultimate size of their nest egg.
Not having a detailed understanding of their benefits could explain why such bad behaviors are so common among participants. Evidence of this can be seen in a recent Fisher Investments poll, which found that even though 87 percent of surveyed 401(k) participants said that they were aware that there is some sort of withdrawal penalty on their plan, only 22 percent knew the age at which they can start making penalty-free withdrawals. All of this suggests that there is an opportunity for employers to provide better communication to workers regarding their benefits, as well as more help with general financial planning and education. Just look at the 80 percent of 401(k) plan participants in the Fisher Investments survey who said that they would prefer to work for a company that offers retirement plan support.
Investments in the digital arena should also not be overlooked by employers because most retirement plan participants recently surveyed by Corporate Insight said that email is their preferred medium for receiving benefits communication. Respondents were generally against receiving plan updates via text messaging, although younger workers were somewhat more open to having time-sensitive correspondence sent to their phone, e.g. transaction alerts and security/fee notices. Surveyed participants were also asked about major website features they believe are “very important” or “extremely important,” and respondents most frequently cited security, account information, design (navigation and ease of use), account self-service, transaction capabilities, and planning (advice and education).
All of these responses agree with a Thomsons survey we looked at in October, which found that a majority (64 percent) of employees want to be able to access and manage their benefits online. Moreover, worker respondents who said that they are very satisfied with the tech tools made available by their employer to help with managing their benefits were nearly twice as likely to view their benefits as “innovative or unique”, another compensation variable that can help a business attract and retain talent in an increasingly competitive labor market.
Sources: Investment Company Institute, EBRI, Fisher Investments, Corporate Insight, NAPA, Thomsons Online Benefits, SHRMPost author: Charles Couch