Fixing the 401(k)

The state of retirement savings in America is “terrible,” says Jerome Patterson, a partner with Eide Bailly LLP, a Fargo-based accounting firm with an employee benefits practice in Bloomington. “People aren’t comfortable planning for their financial futures,” he says. “They are likely to spend more time planning a two-week vacation than they are planning for 20 years of retirement. Mostly they are uncomfortable with money and planning for how they will accumulate it and use it. Also, the national savings rate is about 1 percent. We’re just not savers.”

How did we get here? In the past 20 years, companies have been seeking alternatives to the costly and risky pension plans that used to be a hallmark of work life in America. While many employees are still covered by pension plans, the number of businesses offering 401(k)s has rapidly increased.

Sixty-four percent of 454 companies of all sizes surveyed in June 2005 by Hewitt Associates, a human resources consulting and outsourcing firm based in Illinois, report that the 401(k) is their primary retirement savings vehicle for employees. That’s up from 41 percent in 1999, notes Rob Reiskytl, a senior retirement benefits consultant for Hewitt who works from its Minneapolis office. 

As the 401(k) celebrates its 25th anniversary this year, the retirement savings plan is getting a makeover. The number of employees enrolling in a 401(k) has plateaued at 70 percent, Reiskytl says, and many employers want to boost participation rates higher. There is also concern that even if employees do contribute to a 401(k), they aren’t setting aside enough or investing that money very smartly.

A New Approach

While the 401(k) has changed little over its quarter-century existence, companies are changing their approach to managing the savings program. When employers first started implementing 401(k)s, they provided workers with information about the plan and the different funds available. “For a lack of a better term, they said, ‘You go figure it out,’” observes Bruce Shay, senior vice president of Securian retirement savings for Securian Financial Group, a St. Paul–based insurance and retirement-plan company.

Problem is, the majority of employees don’t have the time or believe they don’t have the skills to chart their financial investments. Some have been stymied by the responsibility of figuring out where their investments should go, so they just haven’t signed up. Others enroll and pick their funds, but then ignore the money over the years, never rebalancing the mix of investments to their maximum potential.