Affording Retirement: Behaviors to Avoid and Adopt

There are positive steps one can take to be financially prepared for retirement. And there also are actions one can not take that will help as well, points out an industry insider. 

“The stakes are high,” writes Employee Fiduciary President and CEO Eric Droblyen in “The Pitfalls that Make Retirement Less Affordable,” an entry in the Employee Fiduciary Blog. He stresses the importance of avoiding some actions and taking others in order to be better prepared.   

Pitfalls

Droblyen suggests that there are three factors that will make it harder to save enough for a secure retirement, and that avoiding them will be helpful. 

1. Underperforming assets. Droblyen draws a distinction between 401(k) and IRA investments that are in active funds and index funds; the difference, he says, is that active funds try to perform better than their market benchmark, whereas index funds seek to match it. Droblyen considers underperforming assets to be active funds that do not perform as well as index funds net of fees.

2. Inappropriate asset allocation. An investment strategy that does not maintain a good balance between different asset categories, warns Droblyen, can hurt the ability to save adequately. For instance, he warns, being so conservative when young or taking on too many risks late when investing late in one’s career can hurt the ability to add to one’s balance. 

3. High administrative fees. Droblyen reminds that retirement plan providers do not provide their services for free— they charge direct and indirect fees. The former are deducted from an account balance, he notes, while the latter—which can include revenue sharing and annuity wraps—increase the cost of investments. 

To-Do List

Instead of the factors that can impede saving, Droblyen suggests making sure that a retirement account has these features. 

1. Market returns. Droblyen argues that index funds offer better returns in the long run, better matching benchmarks and having lower fees. “Your retirement savings should earn no less over time,” he writes. 

2. Professional investment advice. Droblyen suggests that advice can be helpful in maintaining “an appropriate asset allocation” and cites a study that found advice increased median retirement account returns. 

3. Minimal administrative fees. Droblyen reminds that administrative fees reduce investment returns. “The lower, the better,” he says.