Opportunities, Challenges Facing 401(k) Plan Sponsors & Fiduciaries

Scott Price, CPA

Fiduciary News recently posted two articles – one with a number of insightful strategies from 401(k) experts from across the country addressing what they see as the biggest issues and another expounding on the opportunities in the industry. At a time when Baby Boomers are retiring in large numbers and the statistics show just how unprepared the majority of Americans are for retirement, a healthy discourse on the state of the 401(k) system is incredibly important.

401(k) Challenge – Participant Education

As I mentioned in the first article on challenges, one of the biggest issues facing 401(k) plans is participant education. Plan sponsors and fiduciaries must continue to improve and increase education for participants in order to help them save early and save enough. A combination of education and automatic enrollment is needed, and some plans are even starting automatic contribution increases to help participants save the necessary amount. The DOL has also proposed various tools and strategies for educating participants, such as lifetime income illustrations.

One important education area relates to the various investment options available to participants and the associated costs of those investments. There is an overwhelming amount of information available to participants (and to plan sponsors, for that matter) and this information is difficult for the average plan participant to understand.

Guidance must be developed that is simple, yet logical, and is presented in a uniform manner so that participants can compare the risks, potential returns and costs associated with the various forms of investments. Educators have begun to recognize the need to express complex information in easy-to-understand terms; otherwise, the average plan participant won’t read and therefore will not use the presented materials.

401(k) Opportunity – Annuitizing Plan Benefits

401(k)s are savings vehicles, but because the holder has the option to spend the money for any purpose, they are not effective retirement vehicles. For a defined contribution plan to be an effective retirement vehicle, two things must occur:

  1. The individuals must not be allowed to have access to the money in the plan before normal retirement age (statistics show that 1 in 4 Americans take a hardship withdrawal).
  2. At retirement the account balance must be annuitized to provide the participant a steady stream of income for life.

Offering annuity options to participants will more effectively create a lifetime income stream for retirees. As people live longer, annuities are an important option to help provide sufficient retirement income.

While there are a number of 401(k) issues and opportunities we can dissect, one thing is for certain – retirement security will continue to be a topic of conversation and plan fiduciaries will continue to face evolving regulations in order to help increase participants’ savings.

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