Is Your Retirement Plan on MARS?
How to Improve Your Minimum Adequate Rate of SuccessIf you are the owner of a company and you sponsor a qualified retirement plan, such as a 401(k), I’d like to ask you to consider the following scenario. Imagine you are about to board an airplane at Bradley International Airport. Your destination is Los Angeles. As you are checking in at the gate, the agent comes on the PA system and says, “ladies and gentlemen, I have an announcement to make. The captain and the FAA want me to let you know that there is an 85% chance that this plane will not make it to your final destination on time and safely. Have a nice flight!”
Would you board that airplane? Of course not! Why? There is not a minimum adequate rate of success (MARS) for you to feel comfortable that you will get to your destination on time and safely.
Let me ask you another question: what is the MARS of your company’s 401(k) retirement plan? What is the minimum adequate rate of success that all of your employees will arrive at their final destination (retirement) with an adequate percentage of replacement income? Will they arrive at their retirement destination on time and safely, with enough money to generate a ‘paycheck for life’ to pay for all the things they desire to do when they retire? What percentage of your employees will have replaced an adequate percentage of their current income (i.e. approximately 70% to 90%, adjusted for inflation) at their retirement age? Do you even know?
A reporter at the Dallas Morning News recently interviewed me for a story on the pending employee-fee-disclosure regulations. The reporter read an article I wrote, in which I stated that the majority of retirement expenses have already been available for participants both on their Web site and on their statements. I also noted that while some of the disclosures will be new, the majority of 401(k) participants won’t even notice or care. I went on to tell the reporter that the Department of Labor’s emphasis on fee disclosure and transparency misses the bigger issue — employees need to save more money, not save more on expenses.
Now, don’t get me wrong. Saving on expenses is a good thing, but not the most important factor when it comes to creating paychecks for life through your company’s retirement plan. Study after study has shown that actually increasing your contribution percentage by 1% more per year is six times more valuable than saving 50% of 1% in expenses.
Plan sponsors and advisors need to educate participants on the need to save more money. How much more? To start with, a minimum adequate rate of savings for an employee to successfully accumulate enough money by retirement age is 10%. The average savings rate in America’s 401(k) plans currently stands at a dismal 3% to 4%. The 10% savings rate should be the starting point by which you, the plan sponsor/fiduciary, can begin to benchmark your 401(k) plan’s MARS. Hold your advisor accountable to help you measure this success rate each year, and begin moving the dial by getting employees to save more.
The onus cannot be entirely on your employees. You can (and must) do more to encourage this higher rate of savings by integrating automatic features into your plan:
• Automatic enrollment at a rate at least equal to your company match. If you have a 50% match on the first 6% of pay that employees contribute, then begin the automatic-enrollment feature at 6% of pay. It’s simple. As soon as employees become eligible to participate in your 401(k) plan, they are automatically enrolled at 6%. If they want to opt out, they can. The Vanguard Group and other large providers like Fidelity have done studies showing that 70% of employees who are automatically enrolled stay in the plan at the rate they were enrolled.
• Automatic increase. As an entrepreneur, you know the power of ‘incremental success.’ Every day, you work incrementally to improve the quality of your products and services to increase incrementally your margins and profits. There is no overnight success. It takes a long-term commitment to work every day to improve your business model.
The same can be said of saving for retirement. You don’t get rich overnight. The turtle usually wins the race, one slow step at a time. If the goal is to get a larger percentage of your employees saving 10%, it will not happen overnight. It takes time. However, employees need the support and structure in place to help get them there. This is why adding the automatic-increase feature to your retirement plan is so critical.
If, for example, employees have been automatically enrolled at 6%, then (with the automatic-increase feature) each year employees’ contributions will be automatically increased by 1%. In four years, they will be saving the magic 10% and well on their way to creating a paycheck for life. Similarly, studies show that 70% of plan participants do not opt out of the automatic-increase feature. They don’t actually miss the 1% in their paychecks. With ongoing education on the benefits of incrementally increasing savings by 1% each year, employee success rates will increase.
If your motivation for establishing a 401(k) plan is to provide a valuable benefit to your employees, then you may want consider if the value is truly there. I believe the best way to gauge that value is by focusing on employee success, which you can do by evaluating what your plan’s current success rate is for each employee and what your new MARS benchmark and goal will be going forward.
Getting your retirement plan to MARS won’t be easy and won’t happen overnight. However, neither was getting America to the moon! After President Kennedy announced in 1961 that we would put a man on the moon by the end of the decade, it took us only eight years to do it. If you announced that your company will have a minimum adequate success rate of 10% for 85% of all of your employees by the end of the decade, you can make it happen. You can set in motion all sorts of unforeseen positive forces that will jet-propel a larger portion of your employee population to arriving on time and safely with a paycheck for life at their retirement destination.
Charlie Epstein is the author of Paychecks for Life — How to Turn Your 401(k) into a Paycheck Manufacturing Company (www.paychecksforlife.org). As America’s 401(k) Coach, he has been nominated one of the top 100 Most Influential Individuals in the 401(k) Industry by 401k Wire Magazine. He has trained more than 2,000 advisors across the country on how to create greater success for plan sponsors and plan participants; (413) 478-8580; [email protected]