3 high-value benefits 401(k) participants are overlooking
These benefits of 401(k)s aren’t discussed as widely but can be difference-makers for aspiring retirees.
A widely read article from earlier this summer declared the 401(k) plan was no longer relevant in today’s world. But a vehicle that holds $5.6 trillion in investor dollars and more than 19% of total U.S. retirement assets can’t be obsolete. Can it?
The truth is the 401(k) is one of the greatest benefits ever created through legislation. It was meant to make it easier for employees to save for retirement, providing more options and a vehicle to supplement Social Security and other retirement savings.
The power of the 401(k) to promote savings has expanded as time has gone on, particularly as plan design strategies made way for automatic features, and employers took an active role in helping their employees successfully save.
There are obvious and widely touted benefits offered by 401(k) plans, including the employer match, automatic features, loan capabilities, stable value offerings, Roth options and more. Additionally, there are three other benefits 401(k)s offer plan sponsors and participants that aren’t discussed as widely but can be difference-makers for aspiring retirees.
1. 401(k)s have built-in fiduciary oversight, providing a safer playground for participants.
Retirement plans are required to have corporate fiduciary oversight, thanks to ERISA, but many participants overlook what this aspect means for their experience and long-term outcomes.
The legal requirement for plan sponsors to make the right decisions on fees, investments, plan design and more are designed so the participant can succeed. Josh Itzoe, CFP, AIF, wrote about the importance of fiduciary governance in his new book, “The Fiduciary Formula,” released in August 2020. He argues that “sound fiduciary governance” increases the likelihood of successful outcomes for participants. Risk management, which is often viewed as a primary goal for fiduciary responsibility, actually derives from the focus on participant outcomes.
This employer oversight and corporate backing provides peace of mind for participants and helps ensure someone is always taking a critical look at the plan and its activities. Essentially, this creates a safer playground for the employees, who have a few decisions to make when it comes to their retirement plan like whether or not to invest, how much to contribute and which investment options to select.
The employers carry a much larger responsibility, deciding on the advisor and his or her level of expertise, plan design features like loan and automatic options, vendor and fund lineups and more.
2. 401(k)s prime employers to offer a wider range of financial benefits.
Employer-sponsored plans are often viewed within the silo of retirement. When plan sponsors align with the right advisor, though, the plans can become a springboard to a more robust benefit offering.
One of the biggest challenges plan sponsors face is designing a program that meets the needs of both younger staff and more seasoned employees. Those closer to retirement tend to worry more about financial security in their golden years, while younger savers are often concerned about short-term money needs like paying off debt and unexpected expenses. 401(k)-focused advisors have moved to address this wide range of participant needs, namely through financial wellness programs.
The idea of wellness as an employee benefit originally became popular in a health care context, but within the last five years, the concept of financial wellness has gained traction among employers.
According to PwC’s 2020 Employee Financial Wellness Survey, 58% of respondents indicated that they were stressed about their finances and 50% of employees said this stress was a distraction at work. 401(k) plan participants often toe the line between short-term needs and long-term goals. With competing interests, it becomes difficult to know where to focus attention first. At best, the participant seeks outside counsel from a financial advisor. At worst, they do nothing.
Employers are in a position to solve for both short- and long-term financial needs, lessening employee stress overall and increasing their productivity. While employers are investing the time and resources into designing a strong retirement benefit, it’s wise to also bring the employees’ current finances into the picture.
3. 401(k)s offer a straightforward path to retirement income.
Aspiring retirees have a range of concerns and questions, all specific to their needs. But those concerns typically come down to one question: Am I going to have enough money in retirement? 401(k)s are an important part of the answer to this question. Designed to yield a consistent retirement income stream, they can provide peace of mind whether an investor is five years or 35 years from retirement.
Offering employees retirement income options later means helping them visualize what that success means today. Employees are programmed to think in paycheck dollars; they’ve spent a lifetime working and planning around twice-monthly or biweekly direct deposits.
However, when it comes to retirement, we suddenly ask participants to put on their “actuarial hats,” translating today’s dollars saved into future distributions, while accounting for fees, inflation, Social Security and countless other factors. Participants are lost, not really understanding whether they are really on track for retirement. The right advisor and plan help mitigate this challenge by providing clear and digestible reports that paint the full picture of retirement income.
Who you partner with is just as important as the plan you offer
Plan sponsors rely heavily on their advisor partners for guidance and direction, so it is incredibly important to align with an advisor who specializes in the 401(k) space and understands the evolving regulatory landscape, the latest trends in the sector and the best approaches to communicating with participants.
Retirement-focused advisors are there to bring a holistic approach to plan sponsors and participants — designing programs that meet all the participants’ needs, satisfy the plan sponsor’s fiduciary responsibility and lead participants to a successful retirement.
While some of the hallmark features of 401(k) plans may not be as impactful as they once were, retirement-focused advisors have proactively sought ways to evolve the strategy and incorporate innovative ideas. The 401(k) still has a valuable role in retirement planning and it likely always will.
