It’s on the 401k industry to get it right for American savers.
That was the core message from Jonathan Young during a presentation Thursday morning at the Fi360 conference in Nashville titled, “The Coming DC Storm.”
Young, senior national accounts manager at American Funds, told the audience he does not believe we have a looming retirement crisis, and the 401k industry is not broken.
“We’ve actually done wonderful things for American investors,” Young said, but admitted there are challenges and the private industry can and must do better so that the burden of caring for a large number of retirees does not shift to the government.
One of the biggest challenges? Getting Americans to put more of their salaries into 401k plans. He noted that 3% is No. 1 deferral rate in the country. “We have to change that. We’ve got to get them to start at 6%,” Young said, adding that the aspirational goal is helping workers get to 12% to 15% via auto-escalation strategies. “We have to get them to save more and that’s the reality.”
Young noted that 51% of 401k plans now use auto-enrollment, but only about 8% of them auto-enroll every year. He would like to see that percentage increase. “That is a best practice. It forces them to reaffirm a decision.”
Young also sang the praises of auto-escalation strategies but lamented that they can take too long if the starting point is 2% or 3% and you only escalate by 1% per year. The aspirational goal should be getting participants into double-digit deferral rates as quickly as possible.
At the same time, he cautioned against making it too easy for plan participants to have access to their funds via technology—something that usually results in damage to their plan’s long-term performance.
“We’re making it so much easier for people to be aware of what they have. I am a little concerned that we’re going to make it a little too easy for people to touch it. We’ve got to get them to touch it as little as possible,” Young said.
Young also discussed:
- the changing fee landscape and how it’s been a bull market for fee litigation in recent years, most about excessive fees;
- how the average DC plan now has 19 non-target date funds offered and why having too many hurts participation rates; and
- how most participants underperform if they’re not invested in target-date funds. Participants fully invested in target-date funds had on average 2.9% higher return than non-target date investors.
While Young touched on a number of other topics, we’ll leave you with one final, somewhat unexpected takeaway he provided to attendees of his Thursday morning session at Fi360 in Nashville:
Many of you work with small businesses. Do they like to be called small business owners? No! They don’t feel small with 12 employees. Call them “local businesses”—not small businesses.
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Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
