Home > Library > Stable Times > Volume 9, Issue 3 & 4  

IRAs and 401(k)s: How Employers Can Help Retirees Make It on Their Own

In a world where American workers must increasingly fund their own retirement, it is widely accepted that many will fall short of their goals and either have to work longer, or live less lavishly, than they had hoped in old age. On paper, of course, that shouldn't be necessary. Stacy Schaus, personal financial services practice leader at consulting firm Hewitt Associates, notes that a worker who starts contributing 6 percent or more of their salary to a 401(k) plan at age 25, and earns a real rate of return of at least 4 percent, will be able to replace at least 70 percent of their pre-retirement income with that nest egg beginning at age 65. With Social Security making up the balance of their pre-retirement income, that should lead to a reasonably comfortable retirement.

Of course, many people don't start funding a retirement plan at age 25, fail to save 6 percent or more of their salary, withdraw money prematurely from their accounts, choose investments that carry excessive fees, or otherwise mismanage their accounts. What's more, Schaus told the SVIA Forum, nearly half of retirement plan participants take a cash distribution when they do retire, forfeiting the tax-deferral benefits that would accrue to any balance they left in their plan-or rolled over into an IRA-until they really needed it.

Plan sponsors can help employees make better use of their 401(k) plans, Schaus said, by providing them with more education on the negative impact of cashing out their accounts at retirement. They also can encourage retirees to continue taking advantage of tax-deferred investing by leaving their money in their plan or rolling it into an IRA after they stop working.

Sponsors who want to encourage retirees to stay in their employer's plan, she said, can do so by providing flexible distribution options, allowing retirees to consolidate assets from IRAs and other qualified plans into their employer's plan, introducing alternative income-producing investment options, offering an investment advice service to retirees, and communicating to them upon retirement about the benefits of staying in the plan.

Sponsors who don't want to encourage retirees to stay in their plan can still help them, Schaus said, by educating them on the value of keeping the money in some other tax-deferred investment vehicle outside the plan, such as a rollover IRA or an annuity. Sponsors also can provide access to rollover support via one or multiple providers, making it easy to complete a rollover by developing a simplified rollover process. Finally, employers can help by not allowing retirees to cash out of their plan online. Instead, they can require retirees to call a representative who could encourage them to roll their assets into an IRA or some other qualified plan.

Employees need to become better educated about managing retirement income risk, agrees Keith Hylind, vice president of retirement income strategies for MetLife. He told Forum attendees not only that plan sponsors have a role to play in providing that education, but that help is available to them, too. "As a group, they (employees) look to employers to provide outlets to education and advice," he said. "Financial services firms have the tools and resources to help."

Read Next: Stable Value Managers Advised to Look at Wholesaling to Crack Small Plan Market