You may be or have a CEO, CFO and Chief-Human-Resources-Officer but do you have a Chief Retirement Officer? You may laud that you offer employees a 401(k) or 403(b) plan. But is it truly a retirement benefit for your employees? I believe that question should be assessed based upon what percentage of your employees are on track to replace 70% or more of their final year’s income. Most plans that I have looked at don’t have the ability to answer that question. Let’s examine why few retirement plans can answer that question.
Do your employees know how much they should be saving?
Research by several organizations points to savings as the key variable in creating sufficient retirement savings. In fact research from Unified Trust pointed out that on a relative basis, they found the savings rate to be approximately:
- 5 times more important to achieving retirement success than asset allocation,
- 30 times more important than actuarial assessment& intervention
- 45 times more important than asset quality.
What are you saving? What are your employees saving? Often people are simply told save as much as you can. If your plan was a defined-benefit pension plan it would have an actuary that would tell you what you should be saving to fund your pension obligation to your employees.
If you only save a dollar and get 30% returns you have $1.30. If you save $10,000 and get a 10% return you have $11,000. It is clear who’s better off from an accumulation standpoint. What does it mean when someone says save as much as you can. It is unlikely someone could simply save your whole paycheck for their entire working career simply for their future retirement lifestyle.
Why not work with the equivalent of an actuary, a CERTIFIED FINANCIAL PLANNER™ professional or Chartered Retirement Planning CounselorSM to help guide how much your employees need to save and what rate of return and for how long.
My friends in the field of behavioral finance offer insights into the problem when employees anchor on the match. Often people anchor on how much the company is matching as a queue for how much they should be saving. Let’s say that a retirement planning professional with calculate their savings need at 13%. Let’s say that you offer a 100% match on the first 3% that they save. Wisely they save 3% of their money in order to get 100% of yours. That leaves them 7% short. With each passing year they would have to save a greater percentage in order to make up for the deficiency.
Why not help them understand they need to save 7% more by using the services of a CERTIFIED FINANCIAL PLANNER™ professional or other suitable retirement planning credentials adviser. Many people are paying off student loans, supporting family members and children. They won’t be able to just snap their finger and get the 7% more they need to save. However there is a cost to waiting. That cost may be an additional one, 2% or more in savings should they start saving down the road. However if they are working with Chief Retirement Officer or their lieutenants, they could then begin to plan for areas in their budget that they might be able to rearrange. These actions may be refinancing a mortgage or downsizing their lifestyle in order to find the necessary 7 percentage points of savings.
For some reason the need for an actuary to give guidance to individual participants in a participant directed plan got lost in the move away from defined-benefit plans to defined contribution plans. In other words when the onus for success and liability move from employer to employee it appears people got sold on the benefits of doing it yourself. If the employer needed help why would the employee working individually not need help? We have many examples of state pensions like the one in the city of Illinois that has been marred by the lack a retirement policy statement instead? It would appear that we are focusing on the wrong topic. However, it is investment firms and insurance firms that have been the primary sellers of retirement plans especially in the smaller plan market.
Do your employers know what asset allocation they need?
The “Save More Tomorrow” program by Shlomo Benartzi and Richard Thaler also promotes the 90% of your employees be in professionally managed portfolios. I would argue that hundred percent of the people should be in professionally managed portfolios and that you should benefit from having those delivered by an ERISA three (38) investment manager to help reduce your risk and save you time. Retirement plans were conceived to help people save for retirement not to invest in order to become a billionaire. Besides as the number choices you offer goes up you expand your oversight risks.
Why you may benefit from a Chief Retirement Officer
A Chief Retirement Officer would be focused on retirement and not how much the company spends or the time the company’s employees spend in operation. When some plans hire a stockbroker or investment advisor representative they are looking for someone that can help them create a 5-star investment menu. However, even if you get 5-star investment results if your employees aren’t saving enough there balances won’t grow and they won’t have built up a sufficient balance to convince them to retire. When they don’t you face rising healthcare expenses that come with an aging population and potentially decrease productivity as well.
A Chief Retirement Officer will assume investment fiduciary responsibility for their actions. They will have the tools such as reporting on what percentage of your people are on track to retire people. This feedback gets to the heart of the fiduciary responsibility to work solely in the best interest of your employees.
This person and their team will also have a background the fiduciary processes expected of an ERISA fiduciary. ERISA Attorney Jason Roberts has said that the lowest fiduciary risk position involves both carry out a fiduciary process and providing direct, verifiable assistance for your employees. Contact us if you would like a copy of his fiduciary risk assessment tool.
If you’re interested in learning more, we can help consult with you on re-creating this role or potentially fulfilling it ourselves. Why not contact us today to get the ball rolling?
This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.