The Yankee great Yogi Berra recently passed away at age 90. Having played the game decades ago, most probably remember Berra for his memorable malapropisms as much as the fact that he was one of the best catchers ever. I’m reminded of one of his better quotes that often describes the feeling retirement plan participants experience when they check their asset allocation or balance after a long period of time: “The future ain’t what it used to be.”
Goals change and plans don’t always pan out the way we intended. Many employees approaching retirement are realizing that they haven’t saved enough. Financial security tracker Bankrate.com reports that for those in the 50 to 64 age group, 26% of plan participants say their financial situation has deteriorated in the past year. And 18% have withdrawn funds from their retirement account for an emergency. Health issues, children moving back home and other unexpected expenses contribute to the feeling that one’s retirement future isn’t ending up quite as they thought it might.
In Part I of our retirement plan design series, we discussed how a plan sponsor might go about testing its retirement plan strategy to make sure it reaches its intended audience — employees in different stages of fiscal maturity. This article will address how a plan can actually help its participants evaluate where they are on their retirement savings journey and provide them tools to re-evaluate their strategy.
A few years ago, support for the trend of a retirement plan developing an “education policy statement” began to grow. Such a policy would provide participants with the opportunity to understand a plan’s goals and methods for educating retirement plan participants. While not a bad idea in theory, nervous lawyers and plan fiduciaries quickly quelled that notion for fear they would be held liable for actually having to implement such a policy, and for what might be construed as advice to investing participants. Besides the risk factors associated with endorsing a specific education policy, the practical aspects of drafting something meaningful for all participants was equally as challenging.
Education programs should be customized to a particular audience and performed by trained advisors in a one-on-one meeting or a group setting. An education policy stating anything more than the fact that the plan may provide some savings education opportunities is probably useless. But the notion that a plan might provide some educational guidance and encourage its participants to seek educational opportunities through online tutorials, workshops and advisor meetings may help participants take an active role in their retirement planning and challenge previously-held beliefs that may have originally guided their investment strategy.
Asset allocation used to dominate the conversation when retirement education was introduced. Looking back, it seems like maybe the concentration was a little too focused on where an investor’s money went instead of starting with the first step — encouraging people to simply save more money. The rise of auto-enrollment, default investment mechanisms and target-date funds have helped change the culture of what retirement education should mean. In essence, a fund that shifts its own investment allocation to ensure that you are on target to achieve a specified result upon retirement minimizes the need to educate participants on the pros and cons of complicated fund choices. Most people simply want to know if they are “on track” or not to retire at a certain age with the assurance the money will be there. As life events cause a shift in where a person may end up at the end of that long road to retirement, a plan’s education guidelines and target-fund options will be there to help individuals re-evaluate their goals.
For some investors, the safe approach of a target-fund investment choice might not provide the assurance that the investment strategy is changing with the times. The need for individual participant education and advice, coupled with plan sponsors’ fiduciary concerns, are the main reasons why managed accounts are becoming popular options within 401(k) plans. Managed account providers will act as the fiduciary investment manager or advisor under the Employee Retirement Income Security Act (ERISA), which takes some of the fiduciary pressure off of the plan sponsor while providing participants with access to professional money managers. The concept marries two key components of retirement education of the past and develops customized portfolios in hopes of improving savings. They are positioned as alternatives to the “set it and forget it” mentality associated with target-date funds. A more individualized approach helps provide participants with the security that their savings vehicle is actually fluctuating in response to market conditions and the changing goals of the participants themselves.
Providing educational opportunities and tailored investment management, while still offering tried and true target-date funds, will give plan sponsors options for employees who may need to adjust their savings goals and strategy more than a few times over the course of their career. The plan should ultimately meet the participants at their place of need. We always want our participants to feel secure in terms of where they are heading on their journey toward retirement. Another Yogi Berra maxim best sums it up: “If you don’t know where you’re going, you might wind up someplace else.”
Next month, we’ll conclude our series by examining plan design types that target employees according to job position and salary, as opposed to generational attitude and need. We’ll also discuss strategies that help a plan maintain proper contribution and participation balance while seeking to reward key employees.
For more information, contact us.
Bret works with HR professionals to ensure they have a clear understanding of the rules governing all aspects of human resources. He works with employers to maintain compliance of health and wellness benefit packages under state and federal guidelines, including taxation and healthcare reform.
Bret works with HR professionals to ensure they have a clear understanding of the rules governing all aspects of human resources. He works with employers to maintain compliance of health and wellness benefit packages under state and federal guidelines, including rules of taxation and healthcare reform. Bret holds a bachelor of science in economics from the University of Kentucky and a law degree from the University of Pittsburgh, School of Law.
In our 2015 MarketPulse trend study, we introduce our first annual WellnessPulse benchmarking study, in which we survey our clients about their wellness programs and share key results. We also cover trends in executive compensation and benefits, health plan design, healthcare reform, social engineering and cyber risks, workers' compensation, and retirement benefits.
Download the PDF: MarketPulse 2015
Retirement planning is very different from planning for other benefits because the end goal is many years – even decades – away. It’s impossible to develop a foolproof plan that will guide a 25 year-old to her retirement 40 years later. But the practice of planning, the financial education obtained and the savings habits created along the journey can steer employees closer to reaching their retirement goals.
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