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.
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.”