Getting Workers on Track to Invest Early and Often

By Lisa Bonos
Washington Post Staff Writer
Wednesday, October 15, 2008

As traditional pensions fade from the retirement landscape and workers are forced to take a lot more responsibility for their own financial futures, employers are rolling out a variety of features to help workers prepare for retirement.

The key, according to retirement experts: Get workers started automatically and set them on a course of escalating retirement contributions through their working lives.

Auto-enrollment in company 401(k) plans has gained steam since the government passed the 2006 Pension Protection Act, which gave employers and plan sponsors incentives to adopt such plans. According to consulting firm Watson Wyatt, the number of companies offering automatic 401(k) plans has grown to 39 percent this year from 28 percent in 2006. Companies also have stepped up retirement education seminars.

Mark Iwry, principal at the Retirement Security Project and nonresident senior fellow at the Brookings Institution, thinks automated features are more helpful in preparing workers for retirement than employer seminars. "Intelligent use of defaults is more powerful than the education," Iwry said. Such features, he added, can get "people across the goal line rather than just pointing them to where the goal line is."

Like half of working Americans, Bob Becchia, a restaurant manager in Annapolis, doesn't have access to an employer-sponsored retirement savings plan. Such workplace assistance would be a big step forward, Becchia said, and he'd welcome automation. At age 54, he has about $40,000 in retirement savings and doesn't plan to stop working anytime soon. Becchia has done advocacy work with AARP in support of a bill to require certain small businesses to offer automatic individual retirement accounts. A spokeswoman for Sen. Jeff Bingaman (D-N.M.), one of the bill's sponsors, expects Congress to take up the legislation next year.

Becchia says that auto-IRAs might be particularly helpful for starting his younger colleagues on a more secure path to retirement. "If the money gets in their pockets, it doesn't make it to a savings plan most of the time," he says.

The Employee Benefits Research Institute has found that younger, lower-wage workers are more likely to benefit from auto-enrollment and auto-escalation plans.

Robyn Credico, national director of defined contribution consulting at Watson Wyatt, said auto-enrollment plans can hurt some workers who default to a lower savings rate than would be advisable. If they weren't in an auto-enrolled plan, they might have chosen a higher percentage of their earnings to direct to their 401(k). "It's not the only good idea and not a perfect solution," Credico said.

Employers are searching for the best ways to inform workers about retirement planning. The Corporate Executive Board, a research firm, says companies are more active than they have been in seeking advice from retirement plan providers on topics such as investment selection and workers' retirement security.

"You need to educate them so they understand what they're paying for. Communicating just the right amount of information in a way they can digest it. . . . Employers are still trying to figure out the best practice in doing that," said Suzanne Raffaele, a consultant with the Corporate Executive Board.

Pepco, with more than 2,000 Washington area employees, holds nighttime workshops with Vanguard at locations close to workers' homes to encourage workers and their spouses to attend. And the National Institutes of Health gives employees time off to attend three-day planning seminars run by an independent company that helps federal workers manage their benefits.

Cornell University, which employs about 12,000 people in Upstate New York and which AARP recently named the top workplace for employees 50 and older, is pushing retirement planning as an early career concern. Paul Bursic, director of Cornell's benefits services office, says that while the university concentrates on giving mid- to late-career employees financial advice from its plan sponsors (TIAA-CREF and Fidelity) and a third party (Ernst & Young), it is going to roll out a pre-retirement seminar for people in their 30s and 40s.

Bursic says Cornell also has separate seminars for salaried and hourly employees so their distinct needs can more appropriately be addressed, a tactic that Credico of Watson Wyatt supports. She says education campaigns should be customized based on demographics and issues.

"Targeted campaigns tend to work really well," Credico said, adding that companies should look at their participation rates and say "let's go after this group and figure out why they're not saving."

Once workers have built their 401(k) balances, how should they manage spending during retirement? Iwry and some of his colleagues recently proposed annuities on a trial basis, arguing that automation might be part of the answer.

Aiming to marry the stability of a pension with workers' growing balances in 401(k)-type plans, these scholars are encouraging plan sponsors to test offering automatic income products that retirees could opt out of after two years. While private annuities make up less than 2 percent of retiree income, the proposal argues that an increased sales volume would make such products a better value and help people better manage their retirement funds.

The recent market turmoil might encourage more people to consider the value of predictable, regular income for life, Iwry says. But he notes that questions remain as to whether such an idea can be built in a practical way and whether plan sponsors will offer such a product.

And some people with traditional pensions are realizing they should have saved more to supplement those defined-benefit plans. John Palguta, who spent more than 30 years in federal human resources management and now works for the Partnership for Public Service, says that while it may be easier for government workers to plan for retirement because they have more of a financial base to start from, government workers can tend to have "a little more relaxed attitude" about putting money into their 401(k)-type savings plan than private-sector workers without defined-benefit plans.

Palguta added: "I talked to someone recently who's approaching 55 and I asked about money in the 401(k), and he said, '$5,000 -- that's it. I kind of realized that my retirement plan is that I work until I die.' "

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