With all the attention on providing 401(k) participants with retirement advice, there’s one critical area plan sponsors may be overlooking, warns Jane White, acclaimed financial expert and author.
Before teaching plan participants how to invest, they need to be taught how much they should be saving, says White, the founder and president of Retirement Solutions, LLC, an advocacy and educational organization dedicated to the retirement adequacy of 401(k) participants.
As long as plan participants are offered a fund with a prudent asset allocation strategy, chances are sound investment decisions have already been made for them, White wrote on Retirement Solutions’ site.
So what’s more important is that participants are taught to feed those investments with adequate contributions from their salaries, she says.
How much is enough
White has developed formulas for adequate contribution rates required for a comfortable retirement that factor in a typical employer match of 3%.
If employees start saving right now (meaning they have not participated in a 401(k)-type plan before), here’s how much White says employees need to be contributing — and when:
- Those age 25+ must save at least 10% of their salaries
- Those starting at 35 must save 17%, and
- Those 40+ need to save at least 23% of their pay.
(Note: These figures assume participants are getting a typical employer contribution rate of 3%.)