PLAN DESIGN
TO IMPROVE
RETIREMENT READINESS
By Gabriel Potter, MBA
N
ot so long ago, an American worker could reasonably
expect a steady Social Security check, a pension, and
whatever savings they had accumulated to support their
retirement. With pensions losing popularity and projected
cuts to Social Security, employees in the future will have to rely a
lot more heavily on their own retirement savings, typically earned
through a 401(k) or similar program. These defined-contribution
programs move the central burden of retirement planning back
towards the employee by empowering them to select their own
funds, set their own goals, establish their own risk tolerance,
and so on. However, the evidence demonstrates employees do
not use these programs to their full advantage. The good news
is plan sponsors and employers have been given tools (and safeharbor protection, courtesy of the Pension Protection Act) to
make some smart plan design choices. There are plan design
features which can counteract several common complaints and
ensure employees are getting the most out of their retirement plan.
Complaint #1: “I don’t know which fund to pick.”
Most employees are not financial professionals, and the vast array
of investment options in a retirement plan can be intimidating. Many
employees are understandably apathetic about making additional
time commitments simply to understand the options for a distant
retirement. Conversely, employees are no better served if they do
decide to enroll in their retirement plan without understanding the
options.
Employers who want to make life simpler for their employees may
be well served by adding a Qualified Default Investment Alternative,
or QDIA, to their plan. By default, an employee is automatically
enrolled in this investment, and it is designed to be appropriate for
meeting workers’ long-term retirement savings needs. Practically
speaking, a QDIA usually comes in 2 forms: a balanced fund
with both stocks and bonds, or a target-date retirement fund which
automatically increases the amount of fixed income as a retiree gets
closer to retirement.
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