Retirement, version 2.0

Survey finds a new 401(k) plan taking hold

Tawnie Nelson
Wells Fargo

A new national survey from Wells Fargo shows that a new generation of 401(k) plans is emerging across the country, one that is designed to improve the plans’ effectiveness at generating adequate retirement savings for Americans.

The 401(k) plan, originally a place to save a little extra to augment other savings, was never designed to carry the weight of millions of workers’ retirement savings like it does today. Now, four out of five employers view the 401(k) plan they offer as the primary vehicle for their employees’ retirement security, according to the recent Wells Fargo study.

Many employers are recognizing that a new generation of 401(k) plans is needed – version 2.0 – to meet the huge responsibilities now on the shoulders of all Americans for generating the majority of their retirement income on their own. Version 2.0 of the 401(k) plan is designed to be smarter and easier to use, and it is quickly becoming the norm at many workplaces.

The Wells Fargo survey of nearly 500 companies nationwide found many employers have already adopted aspects of this new generation of 401(k) plans, and more intend to move in that direction within the next year.

The recently passed Pension Protection Act will likely accelerate this trend as it contained incentives for companies to adopt many of these provisions.

Here is what’s new in version 2.0 of the 401(k) plan:

Getting started: automatic or one-step. One-fourth of employers report automatically enrolling workers into 401(k) plans, rather than the traditional method of employees having to sign up themselves. Another 10 percent of employers plan to start doing so in the next 12 months. The pension act also provides clear support for employers who wish to adopt automatic enrollment.

Companies that don’t make enrollment automatic for employees are often making it as easy as possible to get started saving for retirement, even down to just checking a single box on a postcard.

Stepping up to the plate. Increasing how much they contribute to a 401(k) plan is something most people know they should do, but it is very easy to put off until tomorrow. Version 2.0 of the 401(k) plan lets people commit to saving more in the future by having their contribution rate increase every year at a set schedule. Five percent of employers in the Wells Fargo survey plan to add this feature within a year.

Investing with an eye on the target. Twenty-five years of research shows that most workers are quickly overwhelmed when asked to create an investment portfolio. Sophisticated 401(k) plans now feature easy-to-use investments that leave the sophisticated investment theories behind the scenes.

Mutual funds that target a particular risk tolerance or retirement date are offered by nearly half of the companies surveyed, and nine percent plan to add them within a year. Most of the plans that offer these funds use the target date funds that are aimed at a particular year of retirement.

Defaulting is now a good thing. Employers are starting to establish a default investment option and contribution levels for employees because the power of a good suggestion is better than throwing darts at an investment line-up to make your choices.

Defaulting is now a good thing. Employers are starting to establish a default investment option and contribution levels for employees because the power of a good suggestion is better than throwing darts at an investment line-up to make your choices.

Help is frequently available. The new pension law also attempts to encourage more 401(k) plans to provide investment advice for employees. The Wells Fargo survey found that two-thirds of respondents already offer some form of investment advising resources or education to their employees and more plan to add it within a year.

The second generation of the 401(k) plan is taking hold and transforming how Americans save for retirement, and the recently passed pension act will accelerate this evolution.

Tawnie Nelson in Vancouver is Wells Fargo’s Business Banking Manager for Southwest Washington. She can be reached at 360-759-4820 or tawnie.nelson@wellsfargo.com.

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