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Guest Editorial
Asking Too Much From Our 401k Plans
By David Albertson, Editor, Employee Benefit News. Reprinted by permission. Employee Benefit News is a leading publication serving employee benefits decision makers. It provides the most comprehensive, useful coverage available today on the ever-changing business of employee benefits.
By my reckoning, here's what has happened with retirement benefits in the United States over the span of about three generations:
We've gone from a nation without a government-funded safety net, to a nation complacent with Social Security and employer-provided pensions, to a nation skeptical of Social Security and ready to take more responsibility for savings, to a nation that is over-reliant on 401k plans. You might disagree with any of those observations, but the last one is my subject here.
How can we be over-reliant on 401k plans when so many eligible employees are not participating or underutilizing the programs? Granted, both participation and savings rates ought to be higher. But here I am talking about a psychological dependency that seems to have taken root with the millions of working Americans who are contributing to a 401k -- the majority of the workforce at many companies.
This dependency was fostered by some wonderful circumstances, most notably a decade of bullish stock market performance. Obviously there have been market corrections along the way that made 401k participants nervous, but many quickly grew accustom equity investment returns in the 15% to 20% range.
The past two years of declining stock values and market volatility have again seeded doubts, and it's time for some words of comfort and encouragement. Some of the messages have been offered by experts such as Matt Hutcheson, Certified Pension Consultant, MDH Consulting Inc. In a recent letter to friends and clients, he observed in part:
"The American economy is made up of intelligent workers such as, well, you! Millions of people like you are working hard, innovating and creating new goods and services. When such conditions exist, good things happen. It may take five or six years for the market to get back to where it was a couple years ago, but this is okay.
"Swim the same stroke. Focus on developing a retirement plan that replaces your income vs. chasing the highest rate of return. By taking a conservative and intelligent approach, you will be right on track to building your retirement nest egg. Be positive and participate in strengthening our local and national economies."
An entirely accurate, incisive and appropriate message. And yet, as Matt would likely be the first to tell you, there's much more to financial planning than keeping your cool, balancing or rebalancing your assets and waiting for the market to "come back."
In brief, it's time for employees to utilize a variety of strategies and employer-sponsored benefits to protect their overall financial positions, not just retirement savings accounts. The advice is not simply to "max-out" your 401k contribution and let compound interest take you the rest of the way to a comfortable retirement, but to take a more comprehensive view of your financial situation.
For example, many employees find (or should find, with the help of employer-sponsored education) that it's prudent for them to supplement 401k participation with IRA contributions.
Other approaches might be less obvious, however. A growing number of employers, for instance, are sponsoring Section 529 plans to help employees save for their children's college education -- often the number one source of savings competition for retirement plans.
Employers also make available a host of voluntary benefits that can improve a worker's financial picture. These can increase protection, as in the case of group life, supplemental disability and long-term care insurance. But they can also reduce monthly expenses by providing discounts on automobile and homeowners insurance. Some offer assistance with debt consolidation or streamlining.
Another form of assistance, shopping for home mortgage lenders, can offer dramatic assistance to first-time home buyers and home owners looking to refinance at today's low interest rates. Is there anything that feels more financially empowering than the chance to build equity in one's own home?
Taken in combination, these strategies and benefits address employees' current and projected financial well-being. They also underscore the difference between retirement planning education and comprehensive financial education. The former is important for employee benefits, but the latter can help prevent an over-reliance on specific programs such as 401k plans. -- D.A.
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The opinions expressed here are those of the author and do not necessarily reflect the positions of 401khelpcenter.com.
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