On 401(k) plans, the less choice the better

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The 401(k) plan of today is the main source of retirement for most employees. We must begin treating it as such and offer a ‘pension fund’ type plan. This will maximize everyone’s outcome. Following a disciplined, strategic plan leads to success.

But inertia can work to our advantage. To coax greater participation, many firms automatically enroll new hires in the 401(k) plan at a low level — say, 3 percent of their salary. Employees are given the choice to opt out, but most don’t. Studies show that automatic enrollment increases the number of people in a plan by 20 percent.Some critics say automatic enrollment smacks of paternalism. Frank Satterthwaite, an executive with Vanguard who works with institutional clients on retirement plans, disagrees. “To me, paternalism would be I’m putting you in the plan and I’m not letting you out,” he says.

He advises his corporate clients to turn human behavior to their advantage. As behavioral studies show, we tend to make the best choices when presented with fewer options. We also tend to prefer simpler choices and to accept the first ones we’re presented with. So Satterthwaite recommends that the first choice in a 401(k) plan should be a one-stop, target-date retirement fund.

Remember the only goal of your company sponsored retirement plan is to help your employees and yourself successfully retire. By offering a limited amount of managed portfolios everyone will benefit.

Please comment or call to discuss how this would help your company plan.

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