Income Not Assets. Change the 401(k) Conversation

A recent MarketWatch article reporting that individuals are frequently posting details about their 401(k) balances on social media platforms, in a gloating manner nonetheless, has received attention for providing the latest evidence of investor euphoria, as well as possibly being a “jump the shark” moment for what is suitable to share on social media platforms.  Both assertions are debatable, and will prove to be true or misguided in due time, but the article caught my interest for a whole different (and pension geeky) reason—the measure of success displayed was total account balance, and not a monthly retirement income number or similar metric.

Although it is the conventional way the average investor thinks and thus common for a participant to assess how his or her 401(k) account is “doing” by quoting total portfolio value, we as practitioners know that’s a flawed and unfitting approach to judge adequate funding for one’s retirement years.  The fundamental premise of investing for retirement is to manage to a retirement income goal.  In effect, how much do you need and when do you need it?  With that framework in mind, a participant’s focus (and perhaps fodder for their next tweet) should not be whether they currently see two commas in their account balance, but instead should center on how much income their 401(k) assets are on track to generate in retirement.

Notable acclaim and praise has been given to Richard Thaler, rightly so, for his pioneering work on behavioral economics and the resulting receipt of the Nobel Memorial Prize in Economic Sciences (a colleague recently wrote here about Thaler’s work and its practical application to qualified plans), but a fellow Nobel Prize winner, Robert Merton, has also provided important thoughts on retirement plan topics.  In The Crisis in Retirement Planning, Merton suggested a need “to shift the focus of retirement planning from amassing the biggest pot of money possible to guaranteeing a retirement income for life” and “that investment value and asset volatility are simply the wrong measures if your goal is to obtain a particular future income.”  Like, share, retweet.  If only all 401(k) participants had a doctorate from MIT, right?

All joking aside, the 401(k) plan is now the primary vehicle for private retirement saving so it is paramount for the retirement plan industry at large to change the mindset of participants from one of asset value to one of income replacement.  The growing prevalence of retirement readiness illustrations (assuming they’re founded upon accurate and reasonable assumptions) is a good start, but it’s just that—a start.  A concerted effort by all involved to engage both plan sponsors and participants around an organizing principle to rethink how they evaluate progress toward retirement goals and objectives is much needed.

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