What will you do?
Now that you’re through
Everyone is asking you
Where will you go?
Friends want to know
The path is clear
I’ll take it real slow
These are lyrics from "What Will You Do (The Retirement Plan Song)," an original song (Music and Lyrics by David Manierka with Lyrics by Bart Manierka). But the song is about retirement then, not retirement now. And it’s the “now” that will the focus of this blog, the first of an every Monday post in BenefitsPro.com, the new web portal brought to you by Benefits Selling Magazine. So whether you’re an employee benefit administrator or retirement plan advisor, the mission is the same: helping employers provide retirement plans that better prepare employees for retirement.
The need should be obvious to all, but let me share some less than encouraging stats with you:
Let start with the just published 2011 Retirement Confidence Survey conducted by the Employee Benefit Research Institute (EBRI). It’s the 21st such survey by the EBRI, a private, nonprofit research institute based in Washington, D.C., that focuses on health, savings, retirement, and economic security issues. EBRI does not lobby and does not take policy positions.
Here’s a snippet from the Executive Summary:
The 21st wave of the Retirement Confidence Survey (RCS) finds that Americans’ confidence in their ability to afford a comfortable retirement has plunged to a new low at the same time that the recent declines in other retirement confidence indicators appear to be stabilizing. Instead of making fundamental adjustments to their spending and saving patterns in response to the decline in confidence, workers continue to change their expectations about how they will transition from work to retirement in what has been called an age of "the new normal."
So much for the perception. Now’s here the reality. According to Olivia Mitchell, a professor of insurance and risk at the Wharton School, it may be an unpleasant retirement for many people. She says that some may have to stay in the workforce to age 75 or older. The reasons being are financial illiteracy (a topic I’ll cover in more detail in a future post), volatile financial markets, and long life expectancy.
And it’s not just here in the United States but world wide. Professor Mitchell draws upon a comparative international study which she discusses in a interview with Knowledge@Australian School of Business.
So how do we help employees prepare better for retirement in a defined contribution world? 401(k) plans have gone from supplemental savings plans to being the major source of retirement income for working Americans. From my perspective, it’s a two-step process:
First, the employer must determine plan objectives. Is the purpose to:
- Attract, motivate, and retain employees,
- Provide a sense of employer/employee partnership,
- Provide additional compensation without a fixed commitment,
- Maximize benefits for the key employees, or
- Offer a combination thereof?
Second, the retirement plan has to be designed and managed to:
- Meet legal requirements
- Be understandable
- Be cost effective
- Allow flexibility for making contributions
- Maximize benefits for the owner
- Have a full service support system
And that can be a framework for the plans here and now.
But what about those companies that don’t have retirement plans? Spectrem Group, a Chicago-based strategic consulting firm specializing in the affluent and retirement markets has estimated that only 10 percent of companies with less than 100 employees have defined contribution plans. That amounts to 3.8 million employers without plans.
Many of these employers have misconceptions about retirement plans. Here are some of the objectives I hear followed by my response:
- “Retirement plans are too expensive to set-up and administer”. There are retirement plan service providers who are structured to provide cost-effective services to small businesses, and a tax credit may be available for you to set up and maintain a plan.
- “I have to make a contribution every year”. Retirement plans can be set up to provide for discretionary contributions”
- “I have to provide the same contributions for all employees as I do for me”. Not necessarily. There are allocation methods that can be used to provide larger contributions to the owners and still pass IRS compliance tests.
So that’s the big picture for what this blog will be all about: helping employers provide retirement plans that better prepare employees for retirement.
We’ll get started in earnest next Monday.