Report Advocates for Consistent 401(k) / 403(b) Contributions In The Range of 10% to 16% of Pay Over a 30-Year or 40-Year Career

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Position Paper from the Retirement Advisor Council calls for Consistent 401(k) / 403(b) plan contributions in the range of 10% to 16% of pay over a 30-year or 40-year career. The panelists suggest a two-prong approach to measure retirement readiness.

Intuitively, when we’re working with an employer going from a DB-centric to DC-only, the percentage we’re starting at in recommendations of 6% to 8% - for everybody. The goal is to be at 10% average deferrals in 2-3 years.

The Retirement Advisor Council published a Position Paper on the concept of Retirement Readiness and what it means for the 401(k) and 403(b) plans industry. The Position Paper concludes that for many, target income replacement ratios should be higher than the 70-75% conventionally accepted as a rule of thumb. The higher ratio is to account for the projected cost of healthcare in retirement, and traditional financial planning concerns such as personal health, children education needs, and the cost of caring for elderly relatives. Regardless of target income ratio, the six panelists call for consistent contribution levels in the range of 10% to 16% of pay over a 30-year or 40-year career.

To measure retirement readiness, the panelists suggest a two-prong approach: one measure based on income replacement ratios for younger participants with a decades-long horizon to retirement, and a different set of measures for those with limited savings and a shorter timeframe. The Position Paper also touches on the type of tools most impactful on participant behavior. When it comes to automatic enrollment, the six panelists advocate for a default deferral election in the range of 6% to 10% that far exceeds the 2% to 3% many employers adopt out of fear of disruption, which experience suggest is unfounded.

“Intuitively, when we’re working with an employer going from a DB-centric to DC-only, the percentage we’re starting at in recommendations of 6% to 8% - for everybody. The goal is to be at 10% average deferrals in 2-3 years.” says Council member Jim Robison, Principal of White Oak Advisors.

The Position Paper is based on the transcript of a discussion among Council members Jim Robison, Principal of White Oak Advisors, Phil Callahan, Managing Director at Goldman Sachs Asset Management, Gene Huxhold, Senior Managing Director at John Hancock Mutual Funds, Peggy Santhouse Vice President at Diversified, and Jon Shuman, Vice President at MassMutual. The discussion was moderated by Steve Davis, Regional Vice President at The Hartford.

The full Position Paper titled Enhancing Retirement Readiness: Consensus on a Course of Action is posted on the Website of the Retirement Advisor Council: http://www.dcpicadvisors.com/positions.html

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Eric Henon
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