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Why Your Boss Should Update Your 401(k) Plan


I'm Michel Martin, and this is TELL ME MORE from NPR News. Later in the program, we'll talk about a new poll about attitudes of African-Americans about issues like work, health, and relationships. It turns a lot of what you've been hearing in popular media on its head, so we hope you'll stick around for that conversation.

But first, it's time for Money Coach, and today we're taking a closer look at what has become a key part of many workers' retirement plans. We're talking about 401(k) accounts. More than 50 million Americans have them. Back in the 1990s, these were considered an innovative retirement strategy, but now, as traditional pensions are largely a thing of the past and safety net programs have a somewhat uncertain future, some critics are suggesting that 401(k)s are not keeping up with changing needs.

Joining us to talk about that is Ben Steverman. He's reported on this issue for Bloomberg.com. Ben, welcome. Thanks so much for joining us.


MARTIN: So what's wrong with 401(k)s?

STEVERMAN: The problem with 401(k)s is sort of built into the 401(k) concept. It pushes all the risks and all the responsibilities onto the workers, who aren't trained in financial matters. They don't know how to set up 401(k). Most people don't know how to manage their 401(k) accounts, and so what happens is a lot of them don't ever sign up for them. And then, those who do aren't contributing enough. They're not saving enough to ensure that they have an adequate retirement.

MARTIN: Do we know that that's why a lot of people don't sign up? They don't even fill out the paperwork.


MARTIN: And what percentage of people could participate in 401(k)s aren't?

STEVERMAN: It depends on what group you're looking at. But there're some population groups that only about 50-some percent sign up for 401(k) plans. When we make some changes to the designs of the plans, we can get that up to 90 percent. It may be that they don't understand what the 401(k) plan even is. A lot of people don't have the basic financial literacy to really even know what that concept is.

MARTIN: What are the simple changes? You're saying that there are some simple changes that people are pushing, including the Obama administration - they're encouraging employers to adopt. And you're saying, first is sign people up on the first day?

STEVERMAN: Exactly. Don't make them fill out 10 pages of paperwork. Sign them up automatically on their first day. Put them into some default plans. Don't even make them choose which funds to go in. If they want to go in and make changes, they can. If they don't want to be a participant in the 401(k) plan, they can do that, too.

MARTIN: And the second thing you're saying is automatically increase how much each person saves each year. So if a person starts out saving 6 percent - like if the default is 6 percent - then increase it to 7 percent the next year, with the eye toward having everybody saving at least 10 percent of income. Why 10 percent? That seems like a lot.


MARTIN: For some people, that will be a lot.

STEVERMAN: For some people, it will be a lot. Fifteen percent is really where you need to be over the life of your working years to really ensure that you have an adequate retirement and that you're able to retire at 65. That's using some conservative projections. We might get lucky and the stock market might go up more than we predict. But 15 percent is the goal that a lot of people should be pushing for. So if you're only saving 7 percent, you're only going to have half the retirement income you want. And that could be a real problem, especially with the baby boomers retiring in the next 10, 20 years.

MARTIN: But, Ben, the kind of the crux of this is though - isn't it that employers should take more responsibility for encouraging workers to sign up or just signing them up without their permission, right? Basically, or just signing it up on day one and saying it's on you to opt out, as opposed to it being on you to opt in. And then, the second, I think, leg of this is to take more out of the employees' hands, and I think a lot of people want to say, philosophically, they have a problem with that.

STEVERMAN: One thing about that is when employers put these plans in place, people don't really complain about them. Sometimes people will say, I don't want to be participating in this, and then they just get taken out of it. But generally, there isn't the blowback that employers expect. The second point is why are we offering retirement plans if they're not really preparing people for retirement? And the 401(k) system as it is today, it's not projected to provide the level of retirement income that people are going to rely on. And that means we're going to fall back on Social Security, which won't be adequate for most people.

MARTIN: Or pensions. I mean, that's not part of the conversation anymore. I mean, the fact is it was a policy decision to switch more people into 401(k)s as opposed to defined benefit pension plans. That's a policy decision, so why couldn't the policy go the other way?

STEVERMAN: It certainly could, and that's another thing that could be on the menu. We had what was supposed to be a three-legged stool propping up our retirement system. Social Security, private savings, and pensions, and pensions don't seem to be part of that.

MARTIN: But on the whole question, though, of pushing workers to put more into their retirement accounts, is the issue that people aren't saving enough, or is it the issue is that their salaries are too low relative to the cost of living?

STEVERMAN: I'd say the issue is both. I mean, American workers have been dealing with stagnant incomes for three decades now. No changes, no little fixes to the 401(k) system are going to do anything about that. One of the great things about some of these reforms is that they could get people to think a little bit differently about their savings and think about the fact that saving for retirement is doing yourself a favor when you get older. And also, increasing your contribution every year by 1 percent. There are a lot of studies that show people aren't going to notice that. Hopefully, you implement those increases at the same time that you get a small cost-of-living raise, and so you don't even notice it. You might get a 2 percent raise, and 1 percent of that goes into your 401(k) plan.

MARTIN: And before we let you go, if somebody is listening to our conversation who might have access to a 401(k) at work, either signed up and forgot about it or has never signed up, are there any specific actions that you would encourage people to take right now?

STEVERMAN: I would encourage people to sign up. I know it's intimidating. I know that some of the choices can be overwhelming. Sign up, make sure you have stocks as part of the plan; depending on how old you are, the more bonds you should have. Look at the fees on the funds. The lower the fees, probably the better the fund would be for you. And if your employer isn't offering the kind of plan that you want, speak up, because there are things they can do about that.

MARTIN: You know I'm going to ask, Ben.


MARTIN: Did you sign up?

STEVERMAN: I am. I'm signed up.

MARTIN: Okay. You know, I have to check.


MARTIN: Ben Steverman is a personal financial reporter with Bloomberg. He joined us from our studios in New York City. Ben, thank you.

STEVERMAN: Thank you. Transcript provided by NPR, Copyright NPR.

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