Published:

04/17/2013 12:17pm

Is Your Retirement Plan on M.A.R.S.?

If you are the owner of a company and you sponsor a qualified retirement plan, such as a 401(k), I'd like to ask you to consider the following scenario: Imagine you are about to board an airplane at Bradley International Airport (BDL). Your destination is Los Angles (LAX). As you are checking in at the gate, the agent comes on the PA system and says, “Ladies and gentlemen, I have an announcement to make. The Captain and the FAA want me to let you know that there is an 85 percent chance that this plane will not make it to your final destination on time and safely. Have a nice flight!" Would you board that airplane? Of course not! Why? It is not a minimum adequate rate of success (M.A.R.S.) for you to feel comfortable that you will get to your destination (LAX) on time and safely.

Let me ask you another question: What is the M.A.R.S. of your company 401(k) retirement plan? What is the minimum adequate rate of success that all of your employees will arrive at their final destination (retirement) with an adequate percentage of replacement income? Will they arrive at their retirement destination on time and safely, with enough money to generate a “paycheck for life” to pay for all the things they desire to do when they retire? What percentage of your employees will have replaced an adequate percentage of their current income (i.e. approximately 70 to 90 percent, adjusted for inflation) at their retirement age? Do you even know?

A reporter at the Dallas Morning News recently interviewed me for a story on the pending employee fee disclosure regulations. The reporter read an article I wrote, in which I stated that the majority of retirement expenses have already been available for participants both on their website and on their statements. I also noted that while some of the disclosures will be new, the majority of 401(k) participants won't even notice or care. I went on to tell the reporter that the Department of Labor's emphasis on fee disclosure and transparency misses the bigger issue – employees need to save more money (not save more on expenses)!

Now don't get me wrong. Saving on expenses is a good thing, but not the most important factor when it comes to creating paychecks for life through your company's retirement plan. Study after study has shown that actually saving /increasing your contribution percentage by one percent more per year is six times more valuable than saving 50 percent of one percent in expenses.

Plan sponsors and advisors need to educate participants on the need to save more money. How much more? To start with, a minimum adequate rate of savings for an employee to successfully accumulate enough money by retirement age is 10 percent. The average savings rate in America's 401(k) plans currently stands at a dismal three to four percent! The 10 percent savings rate should be the starting point by which you, the plan sponsor/fiduciary, can begin to benchmark your 401(k) plan's M.A.R.S. Hold your advisor accountable to help you measure this success rate each year and begin moving the "dial" by getting employees to save more.

The onus cannot be entirely on your employees. You can (and must) do more to encourage this higher rate of savings by integrating automatic features into your plan:

• Automatic enrollment at a rate at least equal to your company match. If you have a 50 percent match on the first six percent of pay that employees contribute, then begin the automatic enrollment feature at six percent of pay. It's simple. As soon as employees become eligible to participate in your 401(k) plan, they are automatically enrolled at six percent. If they want to opt out, they can. The Vanguard Group and other large providers like Fidelity have done studies that show 70 percent of employees who are automatically enrolled stay in the plan at the rate they were enrolled!

• Automatic Increase. As an entrepreneur, you know the power of "incremental success.” Every day, you work "incrementally" to improve the quality of your products and services to increase "incrementally" your ma