“How many people actually know what they’re saving in their 401(k)s?” asked Anne Ackerley, head of the defined contribution group in the U.S. and Canada at BlackRock.
At a roundtable to discuss retirement at BlackRock in New York, Ackerley said that an informal poll of her own friends and family showed perhaps 40% knew much about their own investments, and very few had real confidence that they are saving enough. The results are common enough, but Ackerley pointed out that 401(k)s are the primary savings vehicle that most people will depend on to fund their retirement.
The industry is facing several headwinds, including participant inertia and lack of understanding, increasing longevity and low interest rates that continue to create challenges for investors in attaining rates of return.
Ackerley said the primary job of the industry is to educate participants as well as plan sponsors. “What is the influence and control employers have over that ultimate retirement outcome?” she asked, noting that the goal of any DC plan is to get more people to save; to get them to save earlier and more; and then get people invested in the right vehicles, such as target-date funds (TDFs).
“Change is hard and slow, but there is a new reality,” Ackerley told PLANADVISER. “People have to save more, and I think plan sponsors are really beginning to understand that.”
All the tools plan sponsors need to get people saving already exist, Ackerley said, and even fairly simple actions—raising defaults, the use of auto features—can quantify and illustrate for plan sponsors how plan outcomes can be affected. “We find they are pretty responsive,” she said, “and they’re starting to embrace some of these changes.”NEXT: The difference eight years can make.
Getting participants enrolled as early as possible in their working careers is key, Ackerley said, illustrating her point with two theoretical 22-year-olds beginning their working lives on the same day. Both earn $50,000 a year. One is auto-enrolled in a TDF at 6% at day one; the other does not beginning making contributions to a DC plan until age 30. “At age 65, [the first] one would have $300,000 more in retirement,” she said.
According to Chip Castille, chief retirement strategist at BlackRock, the conversation is less focused on the accumulated pool of retirement assets, since it’s more productive to consider what those assets can supply in retirement.
In the case of Ackerley’s examples, it’s the difference between 65% and 55% of income replacement in retirement. The two 22-year-olds underscore the substantial difference those first eight years can make to an individual’s retirement, she said.
But plan sponsors themselves must be willing to adopt the appropriate plan design features. “The real trick is to getting people to save more is to raise the default,” Castille told PLANADVISER. Plan participants sometimes look at the features of a plan, sifting for clues, Ackerley said. “If a plan sponsor’s default ratio is 3%, are you saying that’s OK? We all know it’s not.”
Retirement plans, the country and even the planet will have to face the looming challenge of increasing longevity, according to Michael Hodin, executive director of the Global Coalition on Aging.
Longevity is causing profound transformation throughout the world, according to Hodin. There are simply more old people than ever before, he said, and growing old is now the norm. “In country after country, no matter how rich or poor, modern or urbanized, replacement rates of the population are dropping,” he said. The percentage of old citizens to young is also transforming and the impact on fiscal sustain and economic growth, either national or community level, is substantial.
People are simply living unprecedented long lives, he said, which affects income replacement rates in populations all over the globe, and will force countries to address the economic needs and stresses longevity creates. “Longevity changes everything,” Hodin said.