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Reality of retirement funding: sharing responsibility with your employees.

Decades ago, Americans could depend on what's been called a three-legged stool--a stable pension plan, Social Security and a 401(k) plan.

Today, many pension plans have been discontinued, frozen or eliminated, impacting one of the key pillars of the retirement system. Social Security is not as strong either; the funding needs to be shored up, and for many, the benefits represent a lower percentage of their living expenses. The evolution of retirement toward individual responsibility and ownership is putting more importance on the 401(k). We need to do all we can to maximize the full potential of 401 (k) plans. Employers need to be proactive partners in this effort, with their employees, in building a solid retirement system.


How are Americans doing with building up their 401(k) plans? Our research shows the average amount saved for retirement is only $25,000. People predict they'll need a median savings of $350,000, according to results in the 2011 Wells Fargo Retirement Survey. They also estimate they'll need to live on that money for 20 years, but intend to spend 10 percent of it each year. The numbers don't add up to a financially secure retirement.

Nearly three out of four Americans also plan to keep working in their retirement years, based on responses to the same 2011 retirement survey. However, those plans may not work out for many because of health issues or lack of employment opportunities.

Help employees save with a 401(k) plan

Helping today's work force build adequate savings to generate a paycheck for retirement is important for the broader society and for the individual workplace. Employees who know they can retire on their terms are likely to be more motivated and more productive.

With a 401(k) plan, employees can control their own participation, rate of savings, and allocation of investments inside the plan. Measuring whether employees are actively contributing and managing their investments is critical to determine if a 401(k) plan is doing a good job preparing people for retirement.


Employers can measure the health of their plan by evaluating the number of employees that are maximizing the use of the plan. A successful 401(k) plan measures engagement on three levels: participation rate; contribution rate, ideally saving 10 percent or more annually; and adequate diversification, based on retirement age and income.

The participation rate reveals the number of employees contributing to the employer-sponsored retirement plan as compared with the number of employees eligible. The contribution rate is the percentage of the employee salary set aside annually. A related issue is whether the contribution rate is Wowing as the employee prowesses through his or her career with promotions or salary increases. Investment diversification addresses having a mixture of low-risk and higher-risk investments fitting an employee's age, and factoring in whether he or she can ride out the ups and downs of the stock market.

Employers who contribute a match to retirement savings in the plan can also create a big incentive for employees to participate. After setting up the match, adjust it to boost the percentage saved if your employees seem to have hit a plateau. For example, for the same dollars, you could introduce a 25-cent match on the first 10 percent of pay rather than a 50-cent match on the first 5 percent of pay.

Auto programs, such as enrollment and escalating salary deferral increases annually, combined with age-appropriate investment solutions such as target date funds, go a long way to help employees achieve retirement security. Education sessions, both at enrollment time and throughout the year, are critical to increase contribution rates over time. Consider reaching out to employees who don't participate to address their objections and emphasize the benefits of enrollment.


Employers need to play an active role in helping their employees take a disciplined, long-range approach to saving for retirement through a 401(k) plan. Americans have told us they want this kind of shared model.

In the Wells Fargo Retirement Survey, 62 percent said employers should automatically enroll employees in a 401(k) or similar plan, and 61 percent said 401(k) plans should automatically increase the employee contribution rate by 1 percent each year. Also, 79 percent said they wanted employers to provide personal advice to help them manage a 401(k) plan.

Finally, encourage your employees to develop a written plan to achieve 80 percent pay replacement. Establishing whether the employee is on track to replace 80 percent pay and providing educational resources can go a long way to help your employees realize their retirement dreams.

Rod Shipley is Alaska regional director for Wells Fargo's Institutional Retirement and Trust division. Contact him at 907-265-2841 or
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Title Annotation:BANKING & FINANCE
Comment:Reality of retirement funding: sharing responsibility with your employees.(BANKING & FINANCE)
Author:Shipley, Rod
Publication:Alaska Business Monthly
Date:Feb 1, 2012
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