IMHO: Mixed Messages

As we closed up the session, a co-worker of mine commented to me as an aside, “Nobody ever told me I needed to be saving 12% before.” 

Now, this co-worker has nothing to do with our magazines, or the content that fills our Web sites and newsletters.  He just happens to work at a company that, among other things, publishes information about retirement plans.  He’s a participant in our benefit plans, of course—and so he has probably been exposed to all the same types of education and savings materials as anyone (perhaps more).  He’s a smart guy (he’s pursuing his MBA at night), tech-savvy, and he pays attention.  And yet, it wasn’t till he was effectively sitting there as a fly on the wall in a room full of the nation’s best retirement plan advisers that he overheard someone put forth a specific savings-target figure. 

Now, like any good plan sponsor, I can explain that.  I don’t know his individual financial circumstances (I’d have to “work” even to find out how much he’s saving at present), have no idea when he plans to retire, and can’t possibly guess at the viability of Social Security or other resources at that date.  He may marry “well,” he may have a rich uncle—heck, he might even win the Lottery.  I can tell you that his employer offers a solid 401(k) plan, with a robust investment menu (reviewed on a regular basis with our financial adviser), a generous match, access to both managed accounts and target-date funds, and the opportunity for him to sit down with a financial adviser (paid for by his employer, I might add) or get a consult via the phone, as well as through an assortment of Web-based tools.  Looking over the plan’s structure, administration, and fees, it’s hard not to feel that (in the words of the Lone Ranger), “Our work here is done.”

Except, of course, it obviously isn’t.

Now, I don’t know that 12% is the right answer in his individual case.  For all I know, that’s still not going to be “enough”—or, based on the combined results of the aforementioned individual circumstances yet to be discerned, it might be way too much.  Obviously, there are many logistical impediments to us divining with precision what the “right” amount is for every individual situation (including our own). 

That said, IMHO, any number of plan design features convey a different message to participants.  A significant number of plans still don’t provide for an automatic (or even immediate) enrollment.  Those who do generally default employees into these programs at a mere 3% of pay, which, in most plans, isn’t even enough to qualify for the full match.  Many plans match those deferrals only up to 6% (or less), auto-accelerate at just 1% increments, and—if we’re rigidly adhering to the outline provided in the Pension Protection Act—probably cap those automatically accelerated deferrals at 10% of pay.    

We all know that the motivations for those plan designs are nearly as varied as the plans that employ them: They represent the plan sponsor’s sense of a competitive benefit structure, they match the expectations of their current workforce, or perhaps they are simply what the employer can afford at any particular time.  Yet, we all see evidence every day that participants read into these structures a kind of “code” that these are the “right” answers to provide them with a financially secure retirement, rather than representing decisions made for reasons that, while generally sound, are completely unrelated to ensuring individual retirement security.  

We’ve long held off giving people a specific target for savings, for a host of real and legitimate reasons.  I wonder if the time hasn’t come to put a target out there for participants—one that might not be precisely the “right” number for every individual situation, but one that will give them something to aim for, rather than continue to duck the issue and hope for the best.   

It’s a message that I think participants are ready for—and there’s no time like the present.