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.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Wolf tax proposal puts Beaver County Shell plant at risk, gas group head says
- Pittsburgh Business Ethics Awards honors outstanding efforts
- Giant Eagle to close all 8 Good Cents locations
- Oil, gas industry abstractors research public records to report on lease sites
- Lawmakers challenge Fed chair on accountability
- Apple’s foray into cars brings potential woes
- Range Resources boosts 4Q earnings to $284 million
- First Niagara depositors’ money safe, bank says
- Affordable Care Act penalty can lessen amount of tax return
- Morgan Stanley agrees to pay $2.6B for role in mortgage bubble
- Jury orders Apple to pay $533M in patent infringement suit