Will Your 401(k) Help You Meet Your retirement goals?
When it comes to retirement saving plans, Americans can have a variety of options. For millions, employer-sponsored plans are a primary savings vehicle – especially 401(k) plans. It’s no surprise as to why. A 401(k) plan offers a number of benefits, including tax-deferred accumulation, a high contribution limit for pre-tax savings, and in many cases an employer match.
As retirement nears for many Americans, it brings up an important question: How will their 401(k) plan prepare them to enjoy a comfortable, meaningful post-work lifestyle? Even with these benefits, many Americans are dissatisfied with their 401(k) because they perceive shortfalls in other areas. Limited investment options, low access to personal financial advice, and lack of money control are just a few investor frustrations.
There’s also the issue of subpar financial knowledge. Surveys indicate many people don’t understand 401(k)s, even though these plans dominate the workplace savings landscape. According to the Investment Company Institute, as of December 31, 2016 Americans held $7 trillion in all employer-based defined-contribution plans. Of this, $4 trillion was in 401(k) plans – or 57.1% of total defined-contribution plan assets.
Investor Dissatisfaction with 401(k) Plans
In some ways, investor frustrations with 401(k)s may be traceable to a lack of knowledge. Take, for instance, the findings of the “Wellness in the Workplace” survey from KRC Research. In the study, 88% of Americans understood topics like employer matching.
But in other areas they showed an incredible knowledge gap – perhaps in part due to the lack of in-person counseling that comes with 401(k) plans:
- About 71% of workers failed a basic quiz on 401(k)s and retirement planning, with workers missing at least three out of nine questions
- 76% of workers could not define what a mutual fund is
- 57% of respondents didn’t know what percentage of their salary they had to put away so they could meet their retirement goals
- 66% of Americans could not name the provider managing their retirement plan
- Amazingly, nearly 4 out of 5 workers in small-business settings failed to pass the 401(k)/retirement planning quiz
In turn, the survey suggests this knowledge gap translates into a lack of financial confidence and investor distress:
- 50% of Americans report they don’t receive any one-on-one help from their 401(k) provider, but an overwhelming majority wishes they did
- 69% are not comfortable with making 401(k) investment choices
- Over 40% worry they will be unable to achieve their retirement goals
- About 25% of those surveyed failed to remember the process they used to select their 401(k) investments
- 25% express a lack of trust in benefit providers
Interestingly, just 16% of workers regularly monitor their 401(k) accounts, and only 12% devote time to retirement planning.
Why are 401(k)s so Dominant?
As mentioned earlier, 401(k) assets accounted for 57.1% of total defined-contribution plan assets at year-end of 2016. So why are 401(k) accounts the most dominant savings vehicle, even with the investor distress and confusion surrounding them? One primary reason is the employer-matching incentive tied to many 401(k) plans.
In a 2016 Plan Sponsors Council of America survey, 95.6% of employer-sponsored defined-contribution plans made employer contributions. The survey covered 592 plans, of which 263 were 401(k) only, and 324 had a combined 401(k) and profit sharing structure.
Confidence Begins with Education and Knowing Your Options
It’s clear that Americans are undereducated about their personal finances, including 401(k)s. Alleviating this knowledge gap begins with proper learning and taking time to understand your retirement planning options.
In upcoming articles for April, we will cover:
- What consumers expect from their 401(k) accounts
- The pros, cons, and limits of 401(k)s
- The potential impact of 401(k) fees on retirement money
- And much more…
You Can Unlock Your 401(k) without Penalty before Age 59.5
Say you are one of the many investors who are dissatisfied with their 401(k). If you are considering a 401(k) rollover, always consider all of your options carefully. In many cases, a rollover decision is irreversible, so it’s important to make sure you take the right course of action – especially with guidance from qualified tax and legal professionals.
With that said, if you are interested in 401(k) rollover options, you may believe you can’t fully access your 401(k) money, penalty-free, until age 59.5. Actually, you can – there are ways to unlock your 401(k) at any age, with any amount, without any penalty. If it is appropriate for your situation – and we stress that it should be appropriate for your needs, goals, and other conditions – this may be an advanced strategy to consider for your retirement future.