Does your 401(k) mean employees retiring with dignity? Retiring on their terms? Retiring before increasing your firm’s healthcare costs to uncomfortable levels? There are several articles that discuss the Retirement crisis? However those stories seem to be overshadowed by news stories that appear to be more current? It was the Employee Retirement Income Security Act (ERISA) that actually spawned us the 401(k). It was actually intended to help regulate the defined-benefit pension plan. It was years later that Ted Benna got a determination letter from the IRS about section 401(k). You may want to read his not so positive comments from June 2013. That inquiry created the new type of defined contribution retirement plan, known as the 401(k).
What’s in a name, retiring?
I believe one of the problems that we have with the 401(k) and its cousin the 403(b) is its dispassionate letters and number reference. No one says Employee Retirement Income Security Plan. Maybe that is why we have become investment and can I take a loan focus. I once met with an organization discussing my services in delivering and outcomes based retirement plan. While the management seemed to be interested in how they may benefit, they felt that by offering their employees retirement outcomes based services made me a wealth advisor pretending to be a retirement plan advisor.
Often the decision for a 401(k) or 403(b) style Employee Retirement Income Security Act plan is governed by the company’s willingness to:
- Provide a company match and further
- Limit the time spent administering the plan.
This often leads to having a stockbroker they know help them pick a household name insurance or investment company that bundles their insurance and investment expertise with a retirement platform. My experience is that the net effect is not focus on the benefits of the employee but on the ease of installment for the employer. In some cases management is not even aware how much their employees can save in the company’s own 401(k).
Retiring and employer risk
If an employer is trying to help its employees along the path to retiring, why should they bear all of the risk? Most employers are unaware that they assume all of the risk of retirement plan unless they take certain actions. Often a plan is developed to offer competitive benefits versus trying to help employees retire. A recent study by Alliance Bernstein highlighted that about 30% of fiduciaries were unaware that they were. Further it is unfortunate that the Department of Labor and Internal Revenue Service do not automatically send a letter to the employer explaining that they are a fiduciary and the many resources available to learn more about the duties of a fiduciary. I recommend finding providers that will share and if not assume some of the responsibilities and therefore liability such as a discretionary trustee. To learn more about fiduciary functions I recommend reading works from noted award winning fiduciaries Dr. Greg Kasten and W. Scott Simon.
Retiring and employee risk
The greatest risk to an employee is not saving enough money. In a defined-benefit plan and actuary calculates the retirement inputs for your employees-inflation rate, savings rate, expect the returns, etc. I haven’t heard any firms with defined benefit plans opting to do the actuary work on their own to save money. However, with a 401(k) plan essentially that’s what we are asking the employees to do. Your recordkeeper makes tell you that they offer a website where your employees can go to do this calculation. However, are they taking any fiduciary liability for their calculations? For the few employees that may go use their calculations are you letting them know that these calculations are not necessarily based on their best interests and you provide no guarantee of the accuracy or the validity of their assumptions? Instead you can offer your employees the benefit of advisor working in their best interest to provide customized retirement planning advice.
Moving from a 401 (k) mindset to one based on employee retirement income security
The first action is to change how you frame the 401 (k). Rather than just thinking of it as a “me-too”, competitive benefit to one intended to help employees retire. That mindset shift should also help in differentiating you from the competition.
Research from Unified Trust shows that savings by a long margin is more important than investment returns in growing a balance sufficient to create lifetime paychecks. Are your employees aware that your 401(k) plan allows them to save $17,500? That come tax time this will save them more on their taxes than what a traditional IRA? The Save More Tomorrow program recommends that your employees save at least 10%. That means that your $180,000/yr. employee can save 10% ($18,000). If you are already aware of that issue but your highly compensated employees are unable to maximize their savings because of testing let us know so that we can offer counsel.
Why your 401(k) provides a platform for them to save in a tax-deferred manner, is another thing to actually save. Is your average savings rate at least 10%? Are your employees achieving your plan’s benchmark investment performance? If not, do their investments reflect poor diversification and poor risk-adjusted returns? In my experience as a CERTIFIED FINANCIAL PLANNER™ professional the typical employee has needed to get at least the historical returns of a half bond half stock portfolio. I believe part of the answer involves hiring an outcomes based retirement plan advisor who is a fiduciary.
Finally, why should you take on the risk alone in trying to help your employees retire? By selecting a retirement plan consultant that is bound to work in the best interest of your employees you can get unconflicted advice. This person can help you sort through your options for helping your employees as well as minimizing your risk and time in doing so. I believe in selecting structures that limit your risk such as a discretionary trustee and/or an ERISA 3(16) administrator.
Ready to get on the road to retiring? Contact us.