Your Retirement Plan: Set It, But Don’t Forget It

How do you like your pancakes?  The Henn-na Restaurant in southern Japan now uses a robot chef that can complete your order without dropping a single pancake.

Welcome to the new era of automation, right?

In the U.S., we are certainly no strangers to the convenience of automation. According to Statista, we spend more than any other country—projected around $14.6 billion in 2017—on home automation services. If you want instant entertainment, energy efficiency or personal security, just launch an app or click a button, and it’s yours.

Still, automation has some limitations. What if you can effortlessly get what you want, yet somehow fall short of getting what you really need? And how do you detect any difference between the two?

Charles Duhigg shares some insight in his book Smarter Faster Better: The Transformative Power of Real Productivity. Following the 2009 tragedy of Air France Flight 447, which killed 228 passengers, the Federal Aviation Administration urged commercial pilots to avoid letting automation unseat their responsibilities in flight. Duhigg also suggests the concept of mental modeling—that is, thinking through solutions in advance—to help prepare for any negative circumstances.

When it comes to planning for retirement, there are three commonly automated arrangements that warrant a one-off, stop-and-think review from time to time:  beneficiary designations, plan participation and investment allocation.

Beneficiary Designations

About seven years ago, I encountered a circumstance in which a university was listed as the primary beneficiary of a deceased plan participant’s workplace retirement account. A glitch arose because the retirement plan provider required more specificity than what the participant originally provided on his beneficiary form. Did the participant want a particular scholarship funded? Or did he want the funds to benefit a specific college or department within the university? Fortunately, a trustee for the participant’s estate stepped in and provided the necessary instructions to the plan provider.

While most workplace retirement plans or IRA providers have guidelines in place for circumstances in which beneficiary designations are either unclear or absent at the time of an account owner’s death, these guidelines may not align with the owner’s original intentions. It’s also worth noting that beneficiary designations for retirement accounts often override a will or trust’s provisions.

So, if it has been awhile since you last checked on your beneficiary designations for your retirement account, or if you have experienced a life event like a marriage, a divorce, an adoption or a death in your family, then it’s a good idea to revisit your beneficiary designations.

Plan Participation

According to the Plan Sponsor Council of America, nearly 58 percent of all 401(k) plans offer the automatic enrollment feature to participants. This feature takes the guesswork out of enrolling in a workplace retirement plan. That’s the good news.

The bad news is that inertia can prevent many participants from checking on how much they are actually contributing to their retirement accounts, and whether or not their contribution amounts will help them stay on track for retirement.

Will the current amount you are contributing to your retirement help you reach your goal for retirement? In 2017, you can contribute up to $18,000 of pay to your 401(k) or 403(b) retirement account, and an additional $6,000 (as a catch-up amount) if you are at least age 50.

Investment Allocation

The most common default investment option for workplace retirement plans is a target-date retirement (TDF) fund of some kind. According to the Investment Company Institute, American workers held $887 billion in TDFs at the end of 2016. TDFs are practical because they offer plan participants a one-stop, automatic investment allocation based upon their respective ages.

Left unchecked and without additional planning, however, TDFs can give participants a false sense of security that they are inevitably on the right track regarding their retirement goals.

BlackRock’s 2017 Defined Contribution Pulse Survey found that 56 percent of plan participants feel like they will “retire with the lifestyle they want.” But the survey also uncovered that 65 percent of participants are unaware that investment earnings going forward are expected to be substantially lower than they have been historically.

How do lower earnings expectations affect your own plans for retirement? If you are using a TDF, what specific outcomes are they helping you automate?

The principal value of a target fund is not guaranteed at any time, including at the target date. The target date is the approximate date when investors plan to start withdrawing money. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Investing involves risk including loss of principal.