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Are 401(k)s under attack?

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Joseph Ready believes 401(k)s are getting a bad rap — and he thinks the retirement industry shoulders some of the blame.

Ready, who is the Executive Vice President and Director, Wells Fargo Institutional Retirement and Trust, says the financial industry suffers from a lack of consumer trust, and he feels the press has only made the problem worse. But if the industry is the target, he said, the 401(k) has been the bullseye.

During his presentation at the 2014 Retirement Industry Conference in Chicago, Ill., titled “401(k)s Under Attack — I Don’t Get It,” Ready repeatedly cited the need to “change the conversation.”

He noted the many national headlines proclaiming that the 401(k) “experiment” has failed. But he begs to differ.

“I think the system works and I have evidence,” he told attendees.

401(k)s are actually working exactly as they were designed, Ready pointed out. Initially, the system was intended to combine defined benefit plans with Social Security benefits, which were then supplemented by 401(k)s. However, national policy has since shifted from a DB model to a DC model that relies far more heavily on the individual, a shift that severely damaged the retirement plans of many Americans who are now in their 40s and 50s. But younger participants who contribute at 10 percent and diversify “will be fine,” he said. 

Common misconceptions

Part of changing the conversation, according to Ready, is addressing many of the misunderstanding that are out there. For example, he said he often hears that 401(k)s only benefit the wealthy. In fact, 80 percent of 401(k) participants make less than $100,000 and 40 percent make less than $50,000, Early said. In other words, nearly 50 million “not so wealthy” working Americans currently benefit from 401(k) plans.

He also cited the common stat that the average deferral rate for those who are automatically enrolled in plans is 4.3 percent. But he notes that there is a 6.9 percent average for new participants who don’t automatically enroll. The problem, he says, is that “we auto enroll participants at 3 percent and so many of them assume they should stay there. We have to create an environment that encourages a higher participation rate.”

Another common statistic thrown around is that only half of American workers have access to a retirement plan. However, 8 out of 10 full-time workers are eligible for some type of workplace retirement plan, Ready notes. The 50 percent stat, he says, includes seasonal and part-time workers who aren’t eligible.

“We have made progress,” he said. “The system can work and often does work. But it’s not perfect.”

One area where the industry must improve is in helping people come up with a workable plan. He notes that many middle income Americans are being ignored by advisors or simply don’t qualify to work with them. But this group needs to be provided a benchmark or goal to aim for. Whether it’s 70 percent, 80 percent or 85 percent wealth replacement in retirement, people save more effectively when they have a tangible goal in mind, he said

“Plans that make it simple and easy to save and learn have more individuals prepared for retirement.”

What’s in a name?

A key part of changing the conversation is altering the way we think about 401(k)s in the first place. For too long, they’ve been viewed as a voluntary benefit, according to Ready. Americans are often told to “save what you can.”

Instead, the industry needs to begin calling 401(k)s what they are — a primary benefit for retirement, Ready said. After all, they’re “the only way to save for the majority of upcoming workers who no longer have access to defined benefit plans.”

401(k)s should also be given a more prominent role in the annual benefit enrollment conversation, he said. “When it comes time for health and dental enrollment, everyone goes and it gets lots of attention. It needs to be that way for retirement, too.”

And he would like to see guaranteed income products take on a larger role in 401(k)s to help protect Americans from future financial downturns.

Don’t be so defensive

While there’s work to be done, the industry should stop being so apologetic about 401(k)s, Ready said.

“We are making a difference in the quality of life people will have in retirement. It’s working; there are changes to be made, but shouldn’t throw the baby out with the bathwater.”