Is Your 401K Plan on M.A.R.S.?

What is the minimum adequate rate of success for your 401K? 

If you are the owner of a company and you sponsor a qualified retirement plan, such as a 401(k), I’d like to ask you to consider the following scenario: Imagine you are about to board an airplane at Salt Lake International Airport. Your destination is Los Angels (LAX). As you are checking in at the gate, the agent comes on the PA system and says, “Ladies and gentlemen, I have an announcement to make. TheCaptain and the FAA want me to let you know that there is an 85 percent chance that this plane will not make it to your final destination on time and safely. Have a nice flight!” Would you board that airplane? Of course not! Why? It is not a minimum adequate rate of success (M.A.R.S.) for you to feel comfortable that you will get to your destination (LAX) on time and safely.

Let me ask you another question: What is the M.A.R.S. of your company 401(k) retirement plan? What is the minimum adequate rate of success that all of your employees will arrive at their final destination (retirement) with an adequate percentage of replacement income? Will they arrive at their retirement destination on time and safely, with enough money to generate a “paycheck for life” to pay for all the things they desire to do when they retire? What percentage of your employees will have replaced an adequate percentage of their current income (i.e. approximately 70 to 90 percent, adjusted for inflation) at their retirement age? Do you even know?

Fee disclosure regulations have been a significant topic of discussion lately. Many believe the disclosures to employees will be a bombshell, when in reality the majority of retirement expenses have already been available for participants both on their website and on their statements. Yes, some of the disclosures will be new, but the majority of 401(k) participants won’t even notice or care. The Department of Labor’s emphasis on fee disclosure and transparency misses the bigger issue – employees need to save more money (not save more on expenses)!

Now don’t get me wrong. Saving on expenses is a good thing, but not the most important factor when it comes to creating paychecks for life through your company’s retirement plan. Study after study has shown that actually saving /increasing your contribution percentage by one percent more per year is six times more valuable than saving 50 percent of one percent in expenses.

Plan sponsors and advisors need to educate participants on the need to save more money. How much more? To start with, a minimum adequate rate of savings for an employee to successfully accumulate enough money by retirement age is 10 percent. The average savings rate in America’s 401(k) plans currently stands at a dismal three to four percent! The 10 percent savings rate should be the starting point by which you, the plan sponsor fiduciary, can begin to benchmark your 401(k) plan’s M.A.R.S. Hold your advisor accountable to help you measure this success rate each year and begin moving the “dial” by getting employees to save more.

This one cannot be entirely on your employees. You can (and must) do more to encourage this higher rate of savings by integrating automatic features into your plan:

Automatic enrollment at a rate at least equal to your company match. If you have a 50 percent match on the first six percent of pay that employees contribute, then begin the automatic enrollment feature at six percent of pay. It’s simple. As soon as employees become eligible to participate in your 401(k) plan, they are automatically enrolled at six percent. If they want to opt out, they can. The Vanguard Group and other providers like Fidelity have done studies that show 70 percent of employees who are automatically enrolled stay in the plan at the rate they were enrolled.

Automatic Increase. As an entrepreneur, you know the power of “incremental success.” Every day, you work “incrementally” to improve the quality of your products and services to increase “incrementally” your margins and profits. There is no “overnight success.” It takes a long-term commitment to work every day to improve your business mode.

The same can be said of saving for retirement you don’t get rich overnight. The turtle usually wins the race, one slow step at a time. If the goal is to get a larger percentage of your employees saving 10 percent, it will not happen overnight. It takes time. However, employees need the support and structure in place to help get them there. this is why adding the automatic increase feature to your retirement plan is so critical.

If, for example, employees have been automatically enrolled at six percent, then (with the automatic increase feature) each year employees’ contributions will be “automatically” increased by one percent. In four years, they will be saving the magic 10 percent and well on their ways to creating a “paycheck for life.” Similarly, studies show that 70 percent of plan participants do not opt out of the automatic increase feature. They don’t actually miss the one percent in their paychecks. With ongoing education on the benefits of “incrementally” increasing savings by one percent each year, employees success rates will increase.

If your motivation for establishing a 401(k) retirement is to provide a valuable benefit to your employees, then you may want to consider if the value is truly there. I believe the best way to gauge that value is by focusing on employee success, which you can do by evaluating what your plan’s current success rate is for each employee and what your new M.A.R.S. benchmark and goal will be going forward.

Getting your retirement plan to M.A.R.S. won’t be easy and won’t happen overnight. However, neither was getting America to the moon! After President Kennedy announced in 1961 that we would put a man on the moon by the end of the decade, it only took us eight years to do it. If you announced that your company will have a minimum adequate success rate of 10 percent for 85 percent of all of your employees by the end of the decade, you can make it happen. You can set in motion all sorts of unforeseen positive forces that will jet propel a larger portion of your employee population to arriving on time and safely with a paycheck for life at their retirement destination! Blast off and set a higher M.A.R.S. standard for your retirement plan today!


This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This article has been used with permission by its author, Charles D. Epstein, through Mark Lund’s affiliation with The 401K Coach Program.  Mark Lund is known as The 401k Advisor, Investor Coach, The Financial Advisor, The Financial Planner and author of The Effective Investor.  Mark offers investment advisory services through Stonecreek Wealth Advisors, Inc. an independent, fee-only, Registered Investment Advisor firm providing 401k consulting for small businesses and financial Advisor services for professional athletes and individuals.  Stonecreek is located in Salt Lake City, Murray, West Jordan, Sandy, Draper, South Jordan, Provo, Orem, Lehi, Highland, Alpine, and American Fork in Utah.