Q&A: How and why your 401(k) is changing
NEW YORK — Employers are getting smarter about how they run retirement plans. They are making some moves that are good for younger workers, including automatically enrolling new employees in 401(k) plans and defaulting their savings into target-date funds, which offer an investment mix designed to meet retirement goals.
Other choices are raising eyebrows, including International Business Machine's decision to make its 401(k) matching contribution only once a year.
David Huntley, principal at HR Consultants in Baltimore and publisher of “The 401(k) Averages Book,” talks about these and other trends.
Q: What's the latest and greatest in the world of 401(k)s?
A: I'm so encouraged by the number of young people who are contributing to the max in their 401(k) plans. Every young person I talk to — teachers, coaches, engineers, Wall Street types — says they are maxing out in their retirement plans. That's never happened before.
A: The pieces are falling into place. Kids don't seem to think about Social Security, but they are aware that saving is important. The word 401(k) is out there all the time now. Auto-enrollment certainly helps — at least 30 percent of companies will automatically sign you up for retirement benefits. When millennials get hired, the benefits are front and center — not an afterthought.
Q: What's your outlook for older workers?
A: I'm 56, and I'm worried about the investment options for people my age. Even if people have saved enough, what kind of income can you get in a low-interest-rate environment? It's a real concern for people who are in or near retirement.
Q: What are the best options for those older savers who are looking for income?
A: If I had the answer, I'd share it. It's scary. My advice: Don't chase what maybe seems to be an easy solution. I don't think there is one.
A few plans offer annuities for retirement income. But low interest rates and capital requirements for insurance companies make it a huge challenge to create new products to provide income.
Q: Employers now have to disclose the cost of the underlying investments in company retirement plans. What does fee disclosure mean for workers?
A: I'm a big fan of fee disclosure. Sunlight is a good thing.
We have a better understanding that lower expense ratios can help folks grow their balances. You can often take advantage of lower fees through an institutional share class, and you might have other options like index funds that are cheaper.
Q: How much have fees fallen?
A: Every plan is different. A specific number would be difficult to come up with. Some plans are billions of dollars and others are millions. They don't necessarily correlate. Fees are trending downwards as a percentage of assets. The use of passive investment strategies, such as index funds, has a big impact. The gap between passive and active management fees is about 0.30 to 0.40 percentage points — that's a big number. Those savings are real.
Q: What's your opinion of target-date funds?
A: When people ask for retirement advice, I say: “Do you have a target-date fund? Use it.” I think they are fantastic. They are one of the best things that happened to 401(k) plans since the (matching fund).
The issue people debate is really about which asset allocation is better — 60 stocks and 40 percent bonds or 70 percent stocks and 30 percent bonds or some other mix. It's a high-class problem.
Q: What's your opinion of Roth 401(k)s, which let savers pay taxes upfront, rather than upon retirement?
A: If your view is that taxes will go up, they make a heck of a lot of sense. If you think taxes will stay the same or go down, they don't make sense.
Q: What kind of advice can I expect to get from my retirement plan?
A: The parameters for evaluating and monitoring advice programs are very clear from the Department of Labor. It used to be a gray area.
Participants have to choose to use these advice services, and the kind of advice you get can vary, but most of the time you'll get advice on the investment choices you have, the asset allocation and how much you should be saving.
But with the huge flow of money into target-date funds, a lot of the investing advice is taken care of for you with a pre-set asset allocation for those participants that choose that path.
Q: Are you worried about the uptick in loans from retirement plans?
A: You'll never see an advertisement on your retirement plan website saying, “Click here for a great loan rate.” We all wish people would not have to borrow from their 401(k)s, but when you consider the alternatives, it's a viable option.
If you are able to borrow from your 401(k) plan, it's better than going to the pawn shop. If you can take a loan from your retirement plan, it also means you are still working. It means you are not tapping more usurious forms of lending.