Magazine article Workforce Management

401(k) Industry Urged to Help Workers Save

Magazine article Workforce Management

401(k) Industry Urged to Help Workers Save

Article excerpt


In a rare public appearance, Abigail Johnson, president of Fidelity Investments' Employer Services Co., has called for employers and financial services providers to take immediate action to address the growing retirement savings crisis.

"It will take years before our political leaders figure out how to reform health care and fix Social Security," she said. "But there is a great deal that financial service providers and plan sponsors can do right now." Johnson spoke last month at the East Coast Defined Contribution Conference in Palm Beach Gardens, Florida. The event was sponsored by Workforce Management and Pensions & Investments.

Johnson warned attendees that in the years 2020 to 2030, there is expected to be a $400 billion shortfall in retirement savings accounts. Johnson, who is expected to succeed her father, Fidelity CEO Edward Johnson, said the problem is that few employees participate in their 401(k) plans, and those who do often make poor choices. Citing Fidelity statistics, Johnson said that one-third of eligible employees do not participate in their 401(k) plans at all. One-fifth of participants don't diversify and only invest in one investment option. Eighty-three percent do not seek out investment advice.

Johnson encouraged plan sponsors to automatically enroll employees into their 401(k) plans using lifecycle funds as the default. The funds reallocate money into more conservative investments as the investor ages. Companies also need to automatically increase the employee's contribution to the plan on a periodic basis.

If employers do this, "inertia will work in (employees') favor in most cases," she said.

By automatically enrolling employees in a lifecycle fund, companies could help low-income workers increase their retirement savings by 29 percent, she said.

Johnson's remarks are supported by the findings of a recent study by Schlomo Benartzi, associate professor at the Anderson School of Management at UCLA. Benartzi's study found that counterproductive investing tendencies and inadequate 401(k) plan design are the two main reasons that employees do not participate in their retirement savings plans. The study was sponsored by AllianceBernstein Investment Management, a New York investment management firm.

According to that study, employees don't know what to do when 401(k) plans offer too many choices. As a result, they often invest in conservative mutual fund options, which won't get them where they need to be to retire, the study says. …

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