Overcoming Bad Assumptions

While there has been a lot of talk the past year about the need to boost participation and deferrals, we don’t seem to be making much progress.

A recent survey from the Profit Sharing/401(k) Council of America (PSCA) on employee participation in 401(k) plans was only up slightly from the prior survey (77.7% in 2005 versus 77% in 2004) and the average pre-tax participant deferrals were unchanged at 5.4% of pay for non-highly compensated workers and 6.9% of pay for highly compensated workers (as defined by the ADP tests).

This is not good news for advisers. Despite an increased awareness of the longevity issues and the decline of pensions, people are still not saving anywhere near enough to create a sizable retirement nest egg. So, the important question is why are participants not contributing more?

• First, according to multiple surveys, participants appear to be making three key unrealistic assumptions: that they will work past age 65, that their post-retirement expenses will be less than during their working career, and that their employers will provide more in the way of retirement benefits than current trends suggest is realistic.
• Unfortunately, health care coverage costs continue to outpace inflation by a considerable amount.
• Many have postponed their child-rearing years, and have to contend with soaring college expenses at a time when they might otherwise have directed more money to retirement savings.
• For younger workers, their debt load coming out of college imposes a significant financial drain on their limited resources – leading many to postpone savings for retirement.
• Finally, some workers have responded to the impact of recent market downturns by pulling back on their 401(k) savings.

To counter these trends, real world examples might do the trick – helping them visualize how that 401(k) balance – projected into the future – equates to a regular monthly paycheck, for example. You can also help them reposition their assumptions by referencing what studies show happen in the “real” world.