401k Savings or Retirement Income Security Act Plan?
The purpose of a 401k or 403b established in the Employee Retirement Income Security Act is retirement income security. The median retirement account balance for all working-age households is just $3,000, according to a research report from The National Institute for Retirement Security. For households near retirement, the median balance is just $12,000. About 80% of all households have saved a total smaller than their annual income for retirement.
Do you know how your employee’s are doing? If not, you could be facing a ticking time bomb of liability. Monitoring puts you in a better position to defend your decisions on investments, fees, etc. is in the best interest of your employees. Noted attorney Jason Roberts, CEO, Pension Resource Institute states that focusing on outcomes puts you in the lowest risk category as a responsible plan fiduciary.
The 401(k) Retirement Planning Evolution
You may be old enough to have heard of the three legged stool of retirement planning: social security, pensions and retirement savings. With pensions mainly a thing of the past and social security ailing, retirement savings has become the focus. A lesson learned from pensions is the use of actuaries. Traditional pensions use actuaries to determine how much the company should save and what rate of return to target. On an ongoing basis the actuaries continue to monitor the situation. At times they tell you if you need to add money based on market returns, etc. The focus is on income not on balances. Few 401k or 403b plans are based on these calculations. Envision a new approach with “401k actuary”.
Focus on retirement income (paycheck) not retirement investing
The new approach can involve three reinforcing modules- one-on-one retirement planning education, group retirement and financial education (not investment only), and targeted employee communications. We start with helping the employee figure out how to build a retirement paycheck. The financial planner shows them what combination of savings, time and investment rate of return will create the monthly retirement income they desire. Rather than focus on what should I invest in, we focus on the number one factor- SAVINGS (10% of nothing is 0.) As employees are not always rational robots, semi-annual or annual consultations can help them get in the game and stay the course.
This approach should be paired with an investment menu made up exclusively of model portfolios selected based on varying risk and return tradeoffs. This allows the rate of return target to be pared with a portfolio whose index benchmark has historically had returns within range of the target. To further reduce risk, you can use one of these portfolios to serve as Qualified Default Investment Alternatives. Better yet, you can hire an ERISA 3(38) investment manager to take on the risk.
Focused retirement and financial education curriculum
Professor Anamarie Lusardi found that as few as one-third of respondents in a sample of people over the age of 50 understand three basic concepts of financial planning: Interest compounding, the effects of inflation, and risk diversification. While one-on-one education is great, there is no substitute for understanding the fundamentals. Using the knowledge gleaned from the one-on-one’s, the financial planning team can develop a curriculum based on the needs of your demographic. In the past, we assumed that everyone would benefit from education period. It fell short because it rarely spoke to the needs of the employees.
An education program that incorporates lifestyle goals, children’s education goals and other competing retirement priorities is necessary. Educating participants on how to incorporate all of their workplace benefits into their plans provides value to participant and employer.
Targeted communications and monitoring
From working with your record keepers system as well as the one-one-one work you will have a new window into how your people are doing. Imagine a performance report that tells you by demographic group, which one’s are doing well and some of the underlie causes. Let’s say that the under thirty group has low participation. You could send them targeted emails to prompt their participation. The email could come in the form of beautiful color foldout detailing where they are headed without intervention. Best of all, this can all be paid for through their individual balances. It is for their benefit and they can and will take it with them. Speaking of taking it with them…
Having terminated employees take it with them- retirement rollovers
Today’s workforce is mobile. Surveys say that many of today’s workers will have more than 10 employers. Once your participants terminate, you should prompt them to take their money with them. They could move it to their next employer’s plan or to an IRA. From their standpoint, out of sight is often out of mind. You have legal responsibilities in keeping them up-to-date will all necessary disclosures and distributions from the plan- sometimes to beneficiaries. LPL Financial through Worksite Solutions Program has developed a systematic approach to tackle this task. While it is easy to see how you benefit, there are a series of steps to take so you don’t overstep the law. The Worksite Solutions Team has been specifically trained and has documentation in place to do this compliantly.
Want to create a program your employees will love? Please email me at firstname.lastname@example.org to learn more..
(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. (2) Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. (3) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IN, IL, MI