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Fidelity Executive Urges More Innovation for 401(k) Plans

Retirement industry professionals have been warning for years that U.S. workers are not saving enough for old age. That does not appear to be changing investor behavior, though. From 1999 through 2005, says mutual fund executive Steve Setterlund, the average amount of salary being socked into 401(k) plans rose almost imperceptibly, to 6.9 percent from 6.7 percent. But the percentage of eligible employees making any contribution at all to their plan actually declined, to 64 percent from 75 percent. The average account balance rose only modestly, from $55,700 in 2000 to $62,500 in 2005, and the median account balance swelled to only $22,300 from $15,700.

"Not only are individuals not changing their behavior," says Setterlund, Vice President of Marketing and Plan Sponsor Strategy for Fidelity Institutional Retirement Services Co., "but in some ways, it's getting worse." He said saving nearly 7 percent of salary wouldn't be bad if workers were receiving matching contributions from their employer and did that for their entire working lifetime. Unfortunately, many join their plans much later than they should. "Their account balances reflect that," he said. "The midpoint has to rise much higher."

Setterlund draws his conclusions from an analysis of the behavior of millions of participants in 401(k) plans for which Fidelity is the recordkeeper. He said that at the current pace, only about 14 percent of participants will be able to retire with the ability to generate 85 percent of their pre-retirement income. That's a fairly conservative estimate of what they might need, especially with health care costs soaring.

Speaking at the SVIA's 2007 Spring Seminar in Charleston, South Carolina, Setterlund suggested that employers can help employees do a better job of saving for retirement by incorporating some of the best features of defined benefit plans into their 401(k) plans. They include features like professionally managed portfolios, options to convert balances to a lifetime of guaranteed income upon retirement, and even an insurance component. The insurance feature would cover individuals who become disabled and unable to work, and who are therefore unable to continue making contributions to their retirement plans. In addition, Setterlund said, employers and policymakers need to address the rising cost of health care if American workers are going to be assured of a financially secure retirement.

Those are tall orders, to be sure. But to allow retirement savings trends to continue on their current path, Setterlund suggested, could leave millions of American workers ill prepared for retirement.

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