Banking and Financial Services Sections

Closing the Income Gap

Taking Steps Now Can Help Ensure a More Comfortable Retirement

Charlie Epstein

Charlie Epstein

This past month I had the occasion to speak at the American Society of Pension Actuaries  401(k) Summit in Las Vegas. As I wandered around the slot machines and blackjack and craps tables, I thought, what an interesting location for a conference on creating a secure retirement for America’s workers.

For the majority of people, saving in their 401(k) over the last few years may have felt like putting their chips down on red number 7 at the roulette table and praying for the ball to fall on that number.

If you had invested in the S&P 500 index for 10 years ending Dec. 31 2008, your average annualized return would have been -1.38% At that time, financial magazines were hyping the “new normal” and the “death of equities.” Fast-forward four years, and the 10-year return was +7.10%. Investing, in any asset class, is a long-term proposition. Just ask Warren Buffett.

So what’s the real message, for both 401(k) participants and their employers who create plans? That we need to begin to focus more on the most important part of the retirement equation. This is ascertaining the income placement for retirement, or what I like to call ‘paychecks for life.’ By receiving education through the advisory firm on their 401(k) plan, participants can use this benefit prudently and not haphazardly from trending financial propaganda.

Here are some steps that should be taken right now:

• Education sessions: Make sure your current advisor and 401(k) carrier provide regular education meetings that not just focus on investment performance, but teach your employees how to calculate exactly what they need to save every month, at a reasonable rate of return, to accumulate enough money at retirement to pay for all the things they  desire to do. I call this ‘desirement’ planning.Why? Because Webster’s definition of retirement is to “put out of use.” I don’t know anyone working today who wants to be out out of use when they retire.

Working today should allow you to retire successfully and do all the things you desire to do tomorrow.

• Annual gap statement: Your current 401(k) record keeper can now provide each employee a gap report to show them, based on their current savings rate and a reasonable interest assumption, how much money they will have at retirement.  Many of the providers will convert this lump-sum number into a monthly benefit — or paycheck for life. Your employees can see how much money they would actually have every month coming to them from their future 401(k) value. For many employees, this benefit is an eye-opening number and something they can easily relate to their current paycheck. It will indicate to them if they are on track or how far they are from replacing their present-day income.

• Plan level employee success: Ask your current record keeper if he or she can provide you with an overall plan-level participant report. This will allow you to analyze plan level demographics and how efficient your employees’ savings behaviors are. The data will allow you and your advisor to customize education meetings for employees who potentially have a major shortfall in obtaining a successful retirement. These outcomes are very effective in getting employees to increase their savings rate or adjust their investment allocations, and even with getting non-participants to start taking advantage of the benefit.

• Bold plan design: National 401(k) studies have proven that employers that implement automatic features encouraging their employees to save and progressively save more will improve the plan’s performance, resulting in healthier 401(k) balances for participants.

Here are the best automated features you should consider adding to your 401(k) plan:

—  Automatic enrollment: All employees, once eligible, are automatically enrolled in the plan. They always have the option to opt out. The more successful plans automatically enroll their employees, not at the minimum 3% savings rate, but at the employer matching rate, which could be 6%. To be eligible to participate in the Exxon Mobil 401(k) plan, an employee must save a minimum of 10%. That’s bold plan design, but it works. The truth is, employees must be saving at least 10% of their pay to achieve a paycheck for life. For older employees, the rate may be higher.

— Automatic increase: One way to get employees to the magic 10% savings rate is to automatically increase their contributions by 1% per year. This is incremental success, and it works. If your employees are at 6% today, you will do them a great service by automatically increasing their contribution by 1% a year until they get to 10%. Again, employees always have the option to opt out of this feature.

These simple steps — customized education, income-gap statements for all your employees, along with two automatic plan-design features — will go a long way toward helping your employees view their 401(k) as a personal paycheck-manufacturing company. Leave the gambling to the casinos.

The Department of Labor greatly encourages you to use these automatic features, to such a degree that, if you follow the proper steps in communicating these automatic features to your employees, they will be granted fiduciary protection.


Charlie Epstein is the author of Paychecks for Life. His book teaches nine principles to help employees turn their 401(k) plans into paycheck-manufacturing companies; [email protected]. His book is available at and at