Since the inception of the first pre-tax salary deferral in the early ’80s, evening news programs have chronicled the flows associated with 401(k) plans. Tabulation of “How much American workers saved for their own retirement last month” became a featured news story during the first week of every month.
A lot has been learned from the growth of 401(k) plans—but some of what has been learned was not exactly what participants wanted to hear. Participants did not save enough in the ’80s and ’90s. An arbitrary company match of 100% on the first 3% of compensation deferred into the plan became the norm. But participant balances grew as the roaring bull market masked the anemic saving rates.
Changing the Narrative to ‘Save More’
During the 2000s, the mantra became, “save more.” This was a wakeup call that still rings true for the majority of plan participants. “Save more” is not exactly what most plan participants—who thought of themselves as active 401(k) plan savers—wanted to hear. Their thought process was: “I’m paying 6.2% Social Security tax and 1.45% Medicare tax, and my employer is paying a similar amount… I’m contributing over 15% of my pay to federal savings plans and another 3% from my own 401(k) plan… and you’re telling me I’m not saving enough?”
The concept of saving more was difficult for most participants. In recent years, courageous plan sponsors have embraced the concept of employing workers who can retire at normal retirement age if they choose to do so. It is encouraging to work with plan sponsors who “get it”—not all of them do. But advisors know they are in the right profession when they have the opportunity to enlighten a plan sponsor who is interested in doing the right thing.
Read more commentary from Steff Chalk here.
Enter one of the biggest challenges the 401(k) system will ever need to communicate: Saving is not easy. Neither is saving more. But converting a 401(k) plan asset base (or a participant account) to a lifetime income stream is even harder. Doing that requires that you explain the concept to plan participants. Nobel Laureate William Sharpe has described the challenge of the decumulation of retirement savings into retirement spending as “the nastiest, hardest problem in finance.”
Changing a Variable on Income Generation
There is one more variable that needs to be factored into any income generation strategy. In the ’70s, a U.S. citizen could reasonably expect to live to age 70. When plan participants worked until their normal retirement age of 65, there was not a lot of difficulty in computing a spend-down strategy. Life was good, but not expected to be long upon reaching retirement.
Today, life expectancy is 14% longer than it was in the ’70s—about 80 years. Assuming the same retirement age of 65, advisors today must be prepared to make a 401(k) nest egg sustain 15 years of retirement.
Future calculations and income generation strategies don’t get any easier. Data from the U.S. Census Bureau supports an estimated life expectancy of 104 years for 50% of Americans born in 2017. Since people are expected to live longer, your role in working with retirees will become significantly more complicated.
The role of the retirement plan advisor has changed over the last 40 years—all for the better, as advisors now have more respect and responsibility than ever before. However, the retirement advisors who deliver the most value to clients in the future will be those who are poised to communicate income generation to plan participants while explaining the importance of a sound decumulation strategy during a long and stable retirement.
Steff Chalk is the Executive Director of The Retirement Advisor University (TRAU), The Plan Sponsor University (TPSU) and 401kTV. This column first appeared in the Winter issue of NAPA Net the Magazine.