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Filling up retirement tanks

Filling up retirement tanks

Early this spring, The Atlantic magazine startled readers with a finding from a Federal Reserve Board survey of Americans' financial status: “Nearly half of Americans would have trouble finding $400 to pay for an emergency.”

The statistic reflects, in large part, the level of poverty and inadequate wage and salary income many Americans confront. But the headline hit home as well among employers with highly skilled, well-paid workers facing an uncertain retirement.

“We know there is a looming crisis in the United States across the board,” said Barbara Brickmeier, vice president for human resource benefits at International Business Machines Corp. The Armonk, New York-based information technology giant sponsors the largest 401(k) defined contribution retirement savings plan in the U.S., with assets of $48 billion and 195,000 plan participants.

IBM represents a growing trend among 401(k) sponsors. It reports that 96% of eligible employees are contributing some amount to the company's most widely subscribed plan. But rather than touting a high participation rate of eligible employees, Ms. Brickmeier and others are measuring their success by the incomes of retirees who have left the 401(k) program.

“IBM has a high participation rate, which we are proud of, but it's not 100%,” she said. Moreover, “we want to be sure that the 401(k) can be viewed as part of the total portfolio, with a focus on retirement income.”

IBM is compiling data to show the results of its effort, Ms. Brickmeier said. But only one in five employees at 77 large U.S. companies have saved at least as much as they need to continue their preretirement lifestyle, according to a survey by Chicago-based consultancy Aon Hewitt. The minimum savings adequacy target is 11 times final pay, Aon Hewitt has determined.

Such analysis, combined with recently enacted federal disclosure rules making retirement plans easier to compare to each other, is driving employers to intervene more directly in shaping the retirement savings habits of their employees.

“No plan sponsor wants to be caught having a plan that underperforms in a significant way,” said Mike Alfred, co-founder and CEO of retirement fund tracker BrightScope Inc., based in San Diego, California. BrightScope rates retirement plans on numerous metrics, including costs, employee participation rates and company contributions.

To boost retirement income outcomes, “a lot more companies are being more aggressive” in setting higher minimum (default) contribution rates by employees subject to automatic enrollment in the company 401(k) plan, said Rob Austin, director of retirement research at Aon Hewitt. In 2001, more than half of companies automatically enrolled new employees at a default contribution rate of 3%. Just 3% of new enrollees faced the higher default contribution rate of 6%. Last year, nearly a quarter of employers imposed a 6% default rate. That means new employees automatically enrolled at the 6% rate contribute twice the percentage of their salary than the previous 3% norm.

The good news, Mr. Austin said, is that there is no sign that more employees are opting out of 401(k) plans with higher default rates. “People need to be saving 15 or 16% of income,” he added. One reason may be that nearly half of employers surveyed now match the employee's contribution dollar-for-dollar, up from 25% in 2011, the Aon survey found.

“The biggest factor and the most obvious (in producing retirement income) is the amount of dollars in the plan, the combination of what the employee puts in and what the company puts in,” said Mr. Alfred.

Beyond pushing higher contributions, companies are encouraging employees to curb their enthusiasm for actively managing their retirement assets. With an eye on boosting employee choice, 401(k) sponsors typically offer a dozen or more investment options. But “when you give the average person too many choices, they don't make the right choice,” said Mr. Alfred.

In 2001, two-thirds of 401(k) participants selected low-yielding “stable value funds,” which are similar to money-market funds. Last year, just 3% of participants chose that option. More than 80% of new enrollees chose target date funds, which automatically alter a portfolio of stocks, bonds and cash from riskier to safer investments as the employee ages, according to Aon Hewitt.

IBM's proprietary target date fund program is the default investment for new hires, Ms. Brickmeier said.

One controversial element of 401(k) rules probably won't change, despite its potential threat to the retirement nest egg: Employees may borrow from their 401(k) accounts. At the extreme, an employee could roll over loan after loan, robbing him or her of the opportunity to build retirement income.

Nearly one-quarter of 401(k) participants reported they have borrowed at least once from their retirement account, according to a survey published this year by the Employee Benefits Research Institute. The top two reasons are paying off other debts and purchasing a home.

Specialists in 401(k) design call the borrowing “leakage” from a wise retirement savings plan. Yet employers are reluctant to eliminate or discourage such loans.

“The ability of people to get the money out is a powerful incentive to save,” said Mr. Austin. “These loans are a necessary evil.”

“It gets employees comfortable that they can invest a lot of their paycheck, because if they need the money for a significant issue they know they can get at the money,” agreed Ms. Brickmeier of IBM. One step to control lending is to limit loans to money the employee — not the company — contributed to the account.

A bigger threat to building retirement assets occurs when workers change jobs and cash out their 401(k)s, said Mr. Austin.

“What we're finding is if individuals leave their employer, they are not rolling their balances over to the new employer,” he said. “They are taking their money as cash, resetting the whole retirement journey.”

Still, apparent employee satisfaction with more aggressive company intervention in retirement savings indicates those who can afford to save appreciate the help. “The onus is on you to save,” Mr. Alfred said.