In the early 1980s, 401(k) plans were heralded as the new pension plan for a more independent and transient work force. In contrast to traditional pension plans, 401(k) participants are in charge of their own retirement destiny, making their own investment decisions and having the option of taking their retirement benefits with them if they change jobs. Now, more than 20 years later, it appears that many 401(k) plans are simply not working, either because employees are not participating in their plans, not deferring enough or not managing their accounts properly.

	Stacy Innerst, Post-Gazette Click illustration for larger version.

According to a recent study by Hewitt Associates, a well known human resources consulting firm, the average 401(k) plan had a participation rate of just 70.3 percent. The same study found that plan participants deferred only 7.9 percent of their compensation and had an average account balance less than $70,000 (with one-quarter of these accounts having a balance less than $5,000!). Additionally, only 16 percent of employees surveyed actually made an attempt to reallocate or rebalance their account, showing that many employees are not taking an active role in preparing for their own retirement.

Why have 401(k) plans missed the mark? Many behavioral finance experts believe that employees are simply overwhelmed by projections that they may need to save as much as 10 to 15 times their current annual salary to create a sufficient amount of retirement income. When faced with what seems to be an insurmountable goal, many employees simply choose to do nothing, thereby making the problem even worse.

		Write us To submit a letter or an essay for consideration for The Private Sector, please send it via e-mail to Business@Post-gazette.com or via regular mail to Post-Gazette Business Section, Private Sector, 34 Blvd. of the Allies, Pittsburgh, Pa. 15222. Please include your telephone number, municipality and return address for verification.

It is also important to note that 401(k) plans have historically been marketed to employers based on their "features and benefits," such as record-keeping and plan administration capabilities, quality of investment options and most recently the ability to control the fiduciary liability of plan trustees. Although certainly important, these issues are frequently overemphasized by financial advisers trying to outdo each other during the sales process and have consequently caused many employers to overemphasize these issues as well.

Instead of concentrating solely on these more technical aspects of 401(k) management, employers also should focus on participant behavior: Are their employees actually using their 401(k) plan and, if they are, how well are they using it? The following management techniques can be used to drive participant behavior, improve overall plan effectiveness, and help plan participants reach their ultimate retirement savings goal:

Automatic enrollment for new employees. This allows newly eligible employees to be automatically enrolled at a predetermined deferral percentage once they have been given an opportunity to "opt out" of the plan. This helps overcome the natural tendency of many employees to procrastinate when it comes to joining their company's 401(k) plan.

Simplified enrollment procedures for existing employees. This technique provides existing employees with a brief educational session and the ability to enroll on the spot. By simplifying the process, employees are less likely to become confused and overwhelmed, thereby increasing the odds they will actually join the plan.

Automatic deferral increases. This allows a plan sponsor to automatically increase the deferral percentage of plan participants over time, avoiding the common problem of participants who never increase their deferral rate after initially joining a 401(k) plan.

More growth-oriented default investment options. This addresses the fact that many participants never make a change once they have been placed in a plan's default investment option and the potential fiduciary concern that using a traditional money market fund as a plan's default investment is overly conservative when compared with other investment alternatives.

Pre-mixed investment portfolios. These investment options come in several different forms, such as "lifestyle funds" or "target funds." They offer participants a simplified investment option tailored to their individual time horizon and risk tolerance.

Automatic rebalancing. This functionality allows plan participants to have their account automatically rebalanced on a routine basis (quarterly, semiannually, annually) to ensure they stay on track.

"Needs-based" employee education and communication campaigns. Research shows that employee education efforts are most effective when plan participants are shown their specific retirement savings need and how to fund that need.

Employer matching contributions. Employer matching contributions can be structured to drive participation and deferral rates, such as offering an employer match of 50 percent on the first 6 percent of employee contributions vs. a 100 percent match on the first 3 percent.

Simply stated, it appears that too many American workers will be unprepared to care for even their most basic living expenses in retirement. Personal savings rates are at all-time lows, consumer debt is skyrocketing and the future of Social Security is in doubt. For better or for worse, the 401(k) plan has become the primary retirement savings vehicle for most Americans. It's time we make sure it's actually working!