While employees think they can handle the tasks of investing, when it comes to the specifics of investing they come up short. This may be where plan sponsors can help employees understand automatic investing. As employees know they need help with specifics, sponsors can provide education about broad categories, like automatic investment tools.
Employees may want to treat retirement like their laundry: set it and forget it. For a while, the news seemed to be full of optimism about robo-investing and other automatic investment tools. But retirement, and any investing, isn’t as easy as lather, rinse, repeat. Instead, a healthy investor may need to spend time reviewing investment plans and rebalancing accounts from time to time. How can sponsors help employees understand how automatic investment tools, like target date funds, work and how to use them effectively? Here are a few ideas.
Many employees think they can handle their own retirement planning. But at the same time, when it comes to specifics, nearly half of them use guesswork to estimate the amount of retirement savings they’ll need. This may mean that while employees think they can handle the tasksof investing, when it comes to the specificsof investing they come up short. This may be where plan sponsors can help employees understand automatic investing. As employees know they need help with specifics, sponsors can provide education about broad categories, like automatic investment tools. Singling out one automatic investment tool, like target date funds, can be a good entry point.
Many 401(k) plans offer target date funds, with a recent study by the Investment Company Institute estimating that about half of plan participants are using this option. These funds allow an investor to choose a retirement date and allow the fund to allocate the investor’s savings to stocks and bond. Lather, rinse, repeat. As the years go on, the allocations become more conservative to protect the savings. These funds make sense for younger investors and for more sensitive to risk investors in their thirties. But the automatic nature of the funds should be used with some caution.
Target date funds use a formula, like a glide path, to shift allocations over time. And, they don’t take into account unknown factors, like a spouse or partner who may need to retire earlier for health (or other) reasons, or a child who may need more assistance from their parents for health (or other) reasons.
The other reason target date funds might need some supervision from employees is that they fail to take into account other financial pressures on those employees. Some employees may think they need to hit their target percentage of savings each month (like 6% of income) and be faithful to their retirement mix to “win” at retirement. But those same employees may be taking loans from their 401(k)s to keep the faith. In fact, almost one third of all Gen Xers have taken a loan, early withdrawal, and/or hardship withdraw from their retirement plans. That’s an alarming amount (especially given how many Gen Xers don’t even have a retirement account). This may mean that employees are borrowing from retirement instead of building an emergency fund. Automatic investment plans may lead employees to think they are winning the future, while they fail to pay appropriate attention to the present. Sponsors can help here by providing education about emergency funds, saving options, even saving aps that help employees use spare change to rebuild those emergency funds.
Sponsors may also want to help employees understand that their investments should be calibrated to more than age. While many target date funds focus on age to allocate risk and aggressiveness of investing, employees may need more conservative or mixed plans based on their families, health, or career curves. Employees with parents who need significant health assistance may need to slow investment plans until that obligation is resolved. Employees whose work is heavily physical, like those in the warehouse of a company, may have an earlier retirement date than those whose work is sedentary, like those at the front desk. Whether they want to retire at the same age or not may not be as relevant as whether they can retire at the same age. By focusing on helping the employees handle specificsof investing, and leaving the tasksof investing to the employees plan sponsors can help employees get the most out of automatic investing tools.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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