Although understanding how a 401(k) works and how much it costs is challenging, how to save is not. There are some streamlined ways to save more and build a better nest egg.
Although you’re shackled to your employer for a retirement plan — unless you have your own IRAs — you have to go with their program. But that doesn’t mean you can’t ask for upgrades. It’s almost like dealing with an airline. Frequent saver miles, anyone?
Employees can easily upgrade their plan options, but you have to push them to improve your plan. If you do, you can not only save more, it will involve less effort.
One of the top reasons Americans aren’t saving enough for retirement is that they have to make decisions on how much to save and choose mutual funds on their own. There’s no really good education on these issues in high school or college, so we come up short.
The quickest way to save more? Don’t think about it. If you’re faced with a array of dozens of mutual funds, it’s going to mess you up. You’ll make arbitrary decisions.
Here are three ways to save more, based on the annual T. Rowe Price benchmarking report:
— Auto-enrollment. With most employers, you have to make a decision whether or not to put money into a retirement plan. The best way to get more people to save is to automatically enroll them.
How does auto-enrollment work? When you start a job, you’re defaulted into the plan and your employer automatically starts deducting contributions, so you don’t have to make a decision.
According the T. Rowe Price report, auto-enrollment is a savings booster:
“About half of the plans it administers have adopted an auto-enrollment feature, a 28% increase since 2011; 30% of plans have auto-enrolled participants at 6% or more, compared with just 17% in 2011.
Participation rates continue to be strongly tied to the adoption of auto-enrollment. Plans with an auto-enrollment feature have a participation rate of 88%, while those that do not have this feature have a participation rate of just 48%.”
-Date Funds as Default Investments. Can you imagine looking at a long list of mutual funds and trying to assemble a portfolio with almost no guidance? That’s what most employers do and it’s ridiculous.
By defaulting employees into Target-date portfolios, the selection process is streamlined. These baskets of mutual funds are pre-selected and reduce stock market risk the closer you get to retirement age.
While target-date funds are not perfect, they can get you most of the way to retirement. For 96% of employers surveyed by T. Rowe Price, target-date funds were the vehicle of choice.
— Raise the Contribution Rate. The more money you sock away, the bigger your nest egg at retirement. The math is irrefutable. Yet you’re not going to get there saving only 3% of your salary or less.
Here’s where employers and workers are coming up short. They are simply not saving enough or saving anything at all:
” Among T. Rowe Price plan participants, the average deferral rate held steady at 7%, far below the recommended level of 15% that includes the employer match. In addition, approximately one-third of participants are not deferring any money to their retirement account.”
The takeaway: Ask your employer to make it easy for you to save more and increase their contribution. The more streamlined the savings process, the less reasons you’ll have not to put money away.