Paternalism Prevalent in 401(k)s

401(k) plan sponsors have a genuine interest in helping participants, says Cynthia Egan, President of T. Rowe Price Retirement Plan Services.

Paternalism is a trend, she said. There is lots of proactive thinking by the sponsors, Egan explained, speaking at a media breakfast last week; many of them are asking “how can we do better?”

In gauging plan level success, T. Rowe Price has implemented a new program called Plan Meter that allows employers to set a goal for how much income replacement the sponsor wants to use as a goal for participant level saving. Egan says when gauging overall plan health, the replacement ratio is a more important level of success than the traditional participate rate.

Christine Fahlund, Vice President and Senior Financial Planner at T. Rowe Price Investment Services, Inc., says that she now suggests participants should be saving at least 15% of their income for retirement, including whatever their employer’s matching contribution is (i.e. if a employer match is equal to 3%, participants should be saving 12%). She says that she still focuses on a 75% replacement ratio in retirement, but admits there might be things that can change.

Although she acknowledges that the automatic plan provisions are a trend making a significant difference in the success of a plan, Egan also says she sees many plan sponsors looking at making their plans simple for the participants. One way this is happening is that plan sponsors are contracting the number of investment options offered in their plan so they are not overloading participants with a choice.

Retirement Income Planning

A retirement income program has to be very flexible, Fahlund said. It is possible to have a rigid product as a program component, but when talking about getting the budget ready, she said, although it is easy to know what discretionary expenses are currently or will be in the near future, it is hard to know what those expenses will be ten years from now, which makes it very difficult to predict.

T. Rowe Price is working on a distribution fund and anticipates having such a product available in the next six months, according to Steven Norwitz, Director of Public Relations at T. Rowe Price.

However, participants are hard to sell on such products, Fahlund said, because people are interested in purchasing the investment that gives them the most in the first year of retirement. Another issue in developing such products is that of principal preservation. “I can give you a higher withdrawal if there is no money left at the end of the term,” and vice versa Fahlund said. Baby Boomers tend to shop around to learn what financial plan gives them the most income each month.