Is retirement readiness the primary goal of your employer-sponsored retirement plan The plan may have been initially set up because you wanted to stay competitive with other employers offering a plan. The plan may have been set up for the benefit of the owners and highly compensated workers. While these short-term goals are understandable, are there larger interests that can increase your ROI (return on investment)? Will older employee’s inability to retire cost you in terms of increasing healthcare costs? Difficulty retaining and recruiting younger, lower cost management talent because of limited upward mobility?
Your self-interest and your retirement readiness
Often I find that business owners, CEOs and CFOs are saving money in the plan but have no personalized retirement savings plan. Some business owners say “why should I worry about that when I plan on selling my business which will fund my retirement?” While I do hope that will be the case for them (and you), market conditions may not be ripe for selling when you’re ready. However, a substantial retirement account balance would act as a hedge for an unfavorable business selling market. Worst case, you’ll have a large retirement balance you don’t need to live your chosen retirement lifestyle. If so, that will open up planning options for family and charity. You’ll also open up some asset protection strategies opportunities. Monies held in retirement accounts such as a 401(k) are also protected from creditors whereas proceeds from a business sale are not.
Retirement readiness and highly compensated employee refunds
Often times highly compensated employees and owners are receiving money back at the end of the year because the plan failed the savings disparity tests. During the year, there typically isn’t much thought about how much employees are savings. I even had the President of one company say, “We’ve been telling them they should save”. As you know, you can’t mandate employees save. However, what help have they received in calculating and understanding the state of their own retirement readiness? Might they need personalized advice? I believe the best way to compel them to save is to automatically enroll them into the plan and provide a personalized retirement gap analysis delivered by a retirement planning specialist such as a Chartered Retirement Planning ConsultantSM.
I believe that if you’re in a small company you should consider working with a 401(k) specialist that’s also a CERTIFIED FINANCIAL PLANNER™ professional. This person can help develop a plan for you how you can combine the sale of a business, a 401(k) and IRA.
Retirement readiness is another way of saying plan retirement income security
My experience as a wealth planning and retirement planner has shown me that most people don’t really think much about retirement until they’re about 10 to 15 years away. Unfortunately the cost of waiting until then typically is very high. The ability for compounding of savings and investing diminishes over time. Even a little bit saved over a long period of time grow.
I believe one of the reasons that Congress allowed for the immediate tax reduction was to motivate people to save given that they were going to get a tax break on their current taxes. I have yet to find someone who has actually calculated their current tax break. Many people who have access to a retirement plan don’t even participate or don’t invest to the maximum. All of these lost opportunities to get your people retirement ready can be very costly if you tend to have low employee turnover. If that’s the case you essentially have a ticking time bomb for increased healthcare costs as the population ages. There is not a lot one can do for you can do to make their prospects better for retirement if they’ve waited half or more of their career with you. Focusing on retirement readiness today deal with this issue today.
Retirement readiness is just simply the right thing to do
Few company decision makers are solely responsible for the retirement plan. When making decisions your sole focus should be the retirement readiness of the participants and their beneficiaries. The law says the sole interests of the participants. The less you can tie your plan decisions to retirement readiness, the more you expose yourself to risk. It is a risk that seems to have no long term upside. There have been a continued onslaught of high profile lawsuits and some not so high profile that have personally cost decision makers money out of their own pocket.
Do you have a retirement income plan?
I’m constantly amazed that more people are not aware that a 401(k) is an Employee Retirement Income Security Act Plan. Do your employees refer to your plan as their retirement income plan? Unfortunately there has not been the depth of education to the masses, including the decision-makers of the plan such as you. In fact did you know that you and not your employees are responsible for their poor investment decisions? There are opportunities or ways to potentially reduce this liability.
Do you know where you stand personally regarding your own retirement readiness? Do your current providers provide reporting that shows how your employees are doing? If not, you should discuss those needs with your current providers to see if they have those capabilities. You could also contact us to help you develop a plan. Make sure to follow our next blog, “Two paths to pursue retirement readiness”.
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.
For Plan Sponsor Use Only – Not for Use with Participants or the General Public