Why 401(k)s Fail: Employees Are Really Confused

Suppose you bought a complicated electronic appliance and you couldn't make heads or tails of the instructions. Would you be more or less likely to use it on a regular basis?

For all of you who've fumbled over VCR or DVR manuals, you know exactly what I’m talking about. When it comes to retirement plans, the situation is far worse.

In a Charles Schwab survey released today, more than half of those surveyed said “401(k) investment information is more confusing than health benefits.”

There’s a tremendous amount of frustration out there in 401(k) land, and it’s not getting any better as Americans struggle to save for retirement. Here are some other key findings of the Schwab survey:

* Nearly half of those polled don’t know what their best investment options are.

* One-third feel a lot of stress in choosing their investment options.

* Ninety percent say they are “on their own” when it comes to funding retirement.

For some reason, the creators of most 401(k) plans forgot to write an intelligent owner’s manual.

There are too many choices. Allocation is difficult. How do you match the right fund combination to your age, risk tolerance and job security? Some employers provide guidelines, but it’s inadequate when presented with a list of more than a dozen options.

The dominant emotion in 401(k) discernment is decision anxiety. We don’t know what the right decision is, so we default to bad choices. How can this be fixed?

There needs to be mandatory workplace education on how to make the best choice.

If employers want to stay in the retirement planning business — and I’m not sure they should — they need to step up to the plate to offer customized advice. If not, we need a broad-based universal plan that’s not linked to employment that stresses automatic saving and prudent allocation. Unless this happens on a nationwide basis, most of us will be stuck with financial appliances we don’t know how to operate.

By: John Wasik

Source: Forbes