But as stocks remain volatile and the recession hampers retirement planning for millions, we sought advice from Christine Marcks, CEO of Prudential Retirement, the retirement arm of financial services giant Prudential Financial.
In our conversation, Marcks outlines a game plan for laid off workers and describes new tools available for today's pre-retirees. Despite what some published reports say, the 401(k) is still very relevant, Marcks adds.
DailyFinance: How would you advise those planning for retirement on how to deal with the volatility in today's market?
Christine Marcks: Retirement plans for most people [should be viewed] as a long-term savings and retirement income vehicle. So that's an important mindset to have over the course of markets that go up and down, both from the standpoint of investing and also from the standpoint of just getting into a regular rhythm of contributing to achieve a goal and not treating a 401(k) plan like a checking account.
It really is there to provide income in the future when somebody retires. So it's different than what you might be looking to tap into on a regular or a short-term basis to finance the purchase of a home or the purchase of a car. So we've tried very hard to get people to stay the course, evaluate how they are invested, evaluate what they are contributing to their plan.
We find most people don't understand how much they need to have saved in order to have a secure retirement. Only 15% of Americans today are on track from a contribution standpoint to their plan to replace 80% of their income when they retire. And that includes Social Security. So there is quite a gap in how knowledgeable people are and how prepared they are for that day when they want to retire.
And we're honestly focused on helping employers better educate their employees and take advantage of what Congress enabled back in 2006 in the Pension Protection Act. That act allows employers to put automatic features into their retirement plans that actually help individuals who aren't necessarily experts on what they need to have saved, how to invest, how to protect their retirement savings in terms of forming an income. There are structures now in plans that help guide them to a better outcome (see more below).
You suggest getting into a regular rhythm of contributing to retirement plans. But what would you say to the millions who have either lost jobs or experienced pay cuts during the recession?
I will continue to advise them that if at all possible, to not tap into what they have in a 401(k) plan -- use it as a last resort. If somebody needs it to put food on the table or to provide the essential, then clearly there's not another option. The benefit of it for most people anyway is that savings is going in on a tax-deferred basis -- you want to protect that tax deferral.
If you have to stop contributing to a 401(k) plan because you've lost a job, then my advice is once you are employed again, right away start contributing to your employers 401(k) plan at your new job. To the extent you can catch up for what has not been contributed over the time that you were out of work, try and catch it up.
I have a bias in terms of suggesting that people really evaluate when they leave a job -- if they don't need the money -- leaving it in an employer plan, because typically there are lower fees in employer plan than in an individual product -- employers getting the benefit of pricing from a fee standpoint and there is more flexibility in terms of taking money out. It's a very challenging environment for some folks and certainly I would suggest that if there is an issue of survival at stake, then you have to deal with that. But if there is a way to keep the savings, hold it off to the side and re-up when you get to a new employer.
Can you explain the importance of asset allocation when it comes to retirement planning?
Diversifying your risk is a very important aspect of risk diversification and risk management. I think it is important that when somebody gets into the plan, that they either choose diversified investments using asset allocation or they use something like a target-based fund that does it for them. The beauty of what employers do now because of the Pension Protection Act is they can put their employees into a Qualified Default Investment Alternative (QDIA) which might be a target date fund or a structure.
We have something called Goalmaker that automatically puts people into investments that are chosen based on risk tolerance for an individual. Are they an aggressive investor, moderate investor, conservative investor -- and [how many] years [are they away from] retirement?
So if they can take advantage of an asset allocation model, that's a very important step and that will get them in a good spot. The other key piece that we are actively promoting now is having regular increases in contributions. The issue is that a lot of folks get a pay raise. And really, what they should be doing quite honestly is before they ever see that in their paycheck, take some percent of it and increase their contribution to their retirement plan. They never see it, so they never get used to living on it.
We can do that now. Employers can choose what they call contribution acceleration so that when salaries go up, there is a way that some portion of the increase can automatically increase contributions to the 401(k) plan. So if you have an employer that has automatic features, they're wonderful tools to take advantage of because the individual doesn't have to do anything. It happens automatically.
You recently released an interesting report called Redefining Defined Contribution Plans. What were some of the key findings?
We just did a survey that suggests that 84% of people who responded think it's time for a new approach or a revised approach to planning and saving for retirement. So this program that we've launched "Redefining Retirement" that really packages the best practices of retirement plans: automatic enrollment, automatic contribution increases, automatic default into diversified investment portfolios, automatic migration into an income guarantee. All of those factors together will put an individual in a better place from an outcome standpoint in terms of what they will have to live on in retirement than what we see happening in plans where these features are not turned on or not activated.
Also, I've seen some articles lately suggesting that maybe it's time to retire the 401(k) plan. And I don't really think that is necessary. I think there are great elements in place and this introduction of guaranteed income options is the latest and a very smart feature as well that mean that we can deliver private sector solutions to solve people's retirement gaps.