Reality of retirement funding: sharing responsibility with your employees.

• Author: Shipley, Rod
• Position: BANKING & FINANCE

Decades ago, Americans could depend on what's been called a three-legged stool--a stable pension plan, Social Security and a 401(k) plan.

Today, many pension plans have been discontinued, frozen or eliminated, impacting one of the key pillars of the retirement system. Social Security is not as strong either; the funding needs to be shored up, and for many, the benefits represent a lower percentage of their living expenses. The evolution of retirement toward individual responsibility and ownership is putting more importance on the 401(k). We need to do all we can to maximize the full potential of 401 (k) plans. Employers need to be proactive partners in this effort, with their employees, in building a solid retirement system.

NEW RETIREMENT REALITY

How are Americans doing with building up their 401(k) plans? Our research shows the average amount saved for retirement is only $25,000. People predict they'll need a median savings of $350,000, according to results in the 2011 Wells Fargo Retirement Survey. They also estimate they'll need to live on that money for 20 years, but intend to spend 10 percent of it each year. The numbers don't add up to a financially secure retirement.

Nearly three out of four Americans also plan to keep working in their retirement years, based on responses to the same 2011 retirement survey. However, those plans may not work out for many because of health issues or lack of employment opportunities.

Help employees save with a 401(k) plan

Helping today's work force build adequate savings to generate a paycheck for retirement is important for the broader society and for the individual workplace. Employees who know they can retire on their terms are likely to be more motivated and more productive.

With a 401(k) plan, employees can control their own participation, rate of savings, and allocation of investments inside the plan. Measuring whether employees are actively contributing and managing their investments is critical to determine if a 401(k) plan is doing a good job preparing people for retirement.

MEASURE YOUR PLAN

Employers can measure the health of their plan by evaluating the number of employees that are maximizing the use of the plan. A successful 401(k) plan measures engagement on three levels: participation rate; contribution rate, ideally saving 10 percent or more annually; and adequate diversification, based on retirement age and income.

The participation rate reveals the number of employees contributing to...