Tips to Help Employers and Employees Conquer Retirement Challenges
By R. Brent Bennett
May 9, 2009
Since no one under 90 years of age has dealt with a financial crisis of the magnitude we’re experiencing now, questions about retirement income and strategies are understandable.
Many 401(k) participants are challenging the appropriateness of their risk tolerance and future strategy. Retirement plans have been a staple employee benefit for some time. Currently, they remain one of the few areas where money can grow without the drag of taxes. But today, there’s certainly a degree of disenchantment due to the drop in value these plans have experienced.
Plan sponsors must focus on participant outcomes and the increased scrutiny they play in the role of a plan fiduciary. While they have no control over the direction of the stock or bond market, plan sponsors do have control over their plan provider, specific investment options and the advisor they choose to work with their participants.
A 401(k) matching contribution or profit sharing program involves the sharing of an employer’s retained earnings or profits with employees. Recently, many employers have needed to suspend matching in order to meet payroll or other operational costs.
In fact, some business owners are trying to decide if their plans should be retained at all. Their employees are disgruntled by the decreasing value, and the business owner considers the related costs of such plans and may think these outweigh the unappreciated benefit.
However, a successful business must retain its best employees who rely on these benefits for retirement, and to justify softer pay increases, long hours and their continued loyalty.
The pragmatic business owner need only take a deep breath and ask some basic questions about their retirement plan. While looking long-term is indeed the goal, some short-term maneuvering is also recommended.
First, a plan’s sponsor should have an IPS (Investment Policy Statement). This document is both a blueprint and report card for the retirement plan. A plan’s advisor should assist in the creation and update of this document and many providers will have a template as a starting place.
The plan sponsor should understand the difference between a “provider” and an “advisor.” The provider, the investment platform itself (i.e. Fidelity, John Hancock or any other investment vendor), is an important component of the retirement plan. Ease of use, appropriateness of investments, the plan’s growth, fees and goals should be reviewed annually.
A plan “advisor” is typically retained to provide analysis and recommendations about the plan and works with the plan sponsor to assist and guide them through the fiduciary process. The advisor also assists employees with enrollment, investment education and communications regarding the plan.
Second, the plan sponsor should be assured of receiving an annual plan review, benchmarking and fund review services. This is important because the landscape of 401(k) providers is constantly changing. Moreover, so are the needs of the plan and its participants—especially now.
An employer assumes the role of fiduciary in making decisions pertaining to a plan, such as the selection of an advisor, provider, fund recommendations and fees for all participants involved in the plan. The Department of Labor provides specific guidelines to help employers avoid liability.
In retirement plans there are two basic types of fees: internal (those deducted from participants’ balances) and external (fees billed directly to the plan sponsor). Although fee disclosure is always important, as plan sponsors suspend matching programs, there is an increased need to determine the appropriateness and balance of internal verses external expenses.
New legislation called 408(b)2 that deals with disclosure and transparency of fees and expenses will soon put increased attention on the internal fees deducted from participant accounts. Plan sponsors should work with their advisors to understand how fees are charged to participants.
Finally, a plan review should include an analysis of the demographic needs as well as participant education and communications, including semi-annual or quarterly meetings. A company with a young workforce tends to require a provider with strong, Web-based capabilities and managed portfolios for easy enrollment and in-depth online research.
Most plan sponsors care deeply about increasing participant outcomes and strongly desire that their employees have the resources necessary to chart a successful retirement. The ability to create a framework that makes this possible is an important step in maintaining participant expectations, and they will value the company’s proactive role. Moreover, the company is satisfying their fiduciary requirement to provide appropriate investment options, reasonable fees and education about the plan.
R. Brent Bennett of Spectra Management is a Registered Representative of and offers securities products and advisory services through Royal Alliance Associates, Inc. Member FINRA/SIPC, a registered broker-dealer. Spectra Management is not affiliated with Royal Alliance Associates, Inc. For more information, call 801.327.7205 or visit www.spectrabenefits.com.