5 retirement blunders of 2011

President George W. Bush signs into law H.R. 4...
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Whenever politicans get involved in a discussion on retirement saving watch out. One question must be, can you rely on the government for your retirement? You must be accountable for your own future.

1. Fuzzy math on tax reforms Remember the Obama-backed “Gang of Six” and the subsequent run-up to the supercommittee epic fail? Somewhere in the midst of the country’s biggest embarrassment of 2011, lawmakers considered eliminating, or at least scaling back, one of the biggest savings incentives for 401(k)s: tax benefits.

Number crunchers at ASPPA estimate the real potential savings of slashing this so-called “tax expenditure” comes in at almost 75 percent lower than figures from “budget hawks.”

Brian Graff, ASPPA’s executive director and CEO says the association’s analysis, “takes the same long-term view that economists employ in evaluating other forms of investment,” and it shows that “the short-term window used in Washington budget scoring overstates the cost of retirement savings incentives – and therefore the savings that would result from slashing these incentives. 401(k) plans and similar plans are the best way for Americans to save for the future. If we reduce the incentives for workers to save through these plans, we will send millions of low- to moderate-income workers into retirement with little savings.”

2. Auto enrollment gets a bad reputation

As a journalist, I can’t stress enough the power of a headline. The Wall Street Journal’s July story, “401(k) Law Suppresses Saving for Retirement,” elicited an alarming angle based on the most pessimistic assumption of a highly researched topic.

The article suggests the Pension Protection Act of 2006 was a catalyst – a legislative side effect, if you will – for a savings shortfall. Though the law encourages companies to automatically enroll participants, the default 3 percent deferral rate traps investors into an inertia that undermines their eventual retirement income.

Still, “The headline of the article reports that auto-enrollment is reducing savings for people. What it failed to mention is that it’s increasing savings for many more-especially the lowest-income 401(k) participants,” says Jack VanDerhei, research director for the Employee Benefits Research Institute – the same think tank that WSJ sought out to provide research on the subject.

EBRI isn’t the only thought analysis that proves auto-enrollment is more of a boon than bust for participation, and in turn, for retirement security. Fidelity reports half of their 401(k) participants are now in plans that offer auto-enrollment, up from 16 percent five years ago.

And, let’s face it, most people wouldn’t be saving at all if it weren’t for their 401(k). Fidelity also reports 55 percent of plan participants wouldn’t save without it and 20 percent have no savings outside the workplace plan.

The financial media does have a powerful influence on how plan sponsors view their company retirement plan. A view point can be skewed in either direction, many times to the detriment of the plan participants.

Please comment or call to discuss how plan design impacts the success or failure of your company retirement plan.

  • After a two-year hold on 401(k) matching, employers come back from recession ready to help plan participants save. – (401kplanadvisors.com)
  • Fee disclosure facts every plan sponsor should know (401kplanadvisors.com)
  • New Survey Reveals How 401k Plan Sponsors Rank 8 Hot Topics (401kplanadvisors.com)
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