Helping Participants: More than Providing a Plan

The most important step in helping employees to save for retirement is to provide a plan in which they can participate. But a blog entry argues that is only a first step. 

In “6 Simple Oversights That Can Ruin Your Retirement Plan,” financial services and investment firm Meld Financial identifies mistakes plan participants make that harm their retirement readiness and suggests that a plan should help make sure these pitfalls don’t blunt the good a plan can accomplish. 

Failing to Enroll in the Plan. The blog cites data from CNBC showing that in 2014, 68% of employers automatically enrolled their employees, meaning that 32% left it up to their employees to enroll.  “Those who don’t enroll in their company’s retirement plan are missing an opportunity to grow their nest egg before they get paid,” writes Meld. 

Ignoring the Account. Most of the time, Meld says, contributions are put in a default investment that likely is not tailored to a individual’s circumstances and objectives. But a participant can choose to have the funds in their account invested differently, in a way that better meets their needs and risk tolerance. 

Further, they warn, leaving the percentage of income contributed at the default level from enrollment can end up resulting in retirement funds that are insufficient. And they add a study that showed that a majority of workers who are automatically enrolled in a 401(k) plan were enrolled at a contribution rate of 3% or less. While “any level of savings is better than not saving at all,” writes Meld, most people need a contribution rate that will allow them to save far more than that.   

Not Taking Advantage of the Company Match. “Smart savers will enroll in company sponsored retirement plans and contribute at least as much as will be matched by their employers,” says Meld. Still, they note, CNBC found that 20% of participants contribute so little to their account that they fail to meet the threshold by which they would qualify for the full match by the company. They argue that taking advantage of the match can help savings grow faster and will be a “key advantage” over more traditional ways of saving. 

Delaying the Start of Saving. “Most successful savers start early,” they argue, warning that people who wait till they’re 30 years old start saving will need to invest over 50% more monthly to reach the same results as those who start at age 25. And they cite a 2019 study that found that half of those age 18-34 are not saving for retirement.

An Undiversified Portfolio. Meld argues in favor of investing funds in a retirement account in a portfolio that is not “too heavily weighted” in one particular industry or company, and that investing in that manner can put one at “excessive risk” and cause one to risk opportunities. They argue that there are many advantages to a more diversified portfolio, which they suggests can better meet market swings and opportunities and meet one’s risk tolerance. 

Not Having a Plan. The writers stress the importance of having a plan for retirement saving and that if one does not, “you’re probably leaving money on the table.”