Add value without increasing costs

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Many employers, in order to survive this economic downtown, have had to reduce the benefits they offer to employees.

Some of the changes include discontinuing matching contributions or suspending profit sharing contributions to employee retirement plans, said Robert L. Book, executive vice president of Strategic Financial Partners.

While many employees are grateful to still have a job, the changes nonetheless add to the already nerve-wracking uncertainty of retirement planning.

“There are many things an employer can do to add significant value to their retirement plan participants and to themselves — without increasing costs,” Book said.

Options include increasing the investment choices available to participants; making sure the fees within the plan are as competitive as possible; adding provisions to the plan, such as the Roth IRA provision, automatic rebalancing and automatic step-up contributions; having in-service withdrawal options available; and providing education to employees so they can make the best decisions about their retirement plans and their futures.

The cost of having a retirement plan evaluated and optimized often can be recouped in the savings to employers of offering provisions that are cost effective for the company, not to mention beneficial to employees.

Because most business owners, executives and managers are too busy working to make retirement plan evaluations a serious avocation, the liability is “high.”

“It’s not their day job to know how to construct a retirement plan,” Book said. “There are 7,600 funds to choose from — how many people have the skill set to do that?”

He recently evaluated a $17 million plan that offered employees nine investment choices — four of the nine were large cap growth funds. By the wildest stretch of imagination, the plan was not diversified.

“It did not have emerging markets, global bond funds, real estate, domestic bonds,” he said, not to mention small- and mid-cap growth or value funds, etc.

Employees can sue the company over losses in their 401(k)s or other defined contribution plans if they can prove “fiduciary breaches impaired the value of plan assets in a participant’s individual account.”

Having a manager for an employee retirement plan reduces fiduciary liability, while increasing financial and educational benefits to employees.

For instance, it does not cost employers more to offer the Roth provision in retirement plans. About half of retirement plans have the Roth option, but that’s no consolation to employees without the option. Qualified contributions to a Roth 401(k) or 403(b) accumulate tax-free.

When evaluating a retirement plan, Book determines whether the plan has a match, profit sharing, Roth provision, eligibility requirements, if it benefits those the employer wants to benefit the most, and if it follows Employee Retirement Income Security Act and Internal Revenue Service guidelines.

If, for example, a plan benefits only highly compensated employees, the company might have to refund money.

A word to employees

“Most employers are in survivor mode right now, (cutting costs) trying to survive,” Book said. “But from an employee’s standpoint, a retirement plan is the most important thing right now. People are frozen by what’s happening in the market and they don’t know what to do.”

Without an expectation, a realistic number, derived from calculations, of what they would like to have in the future for retirement, people tend to just put “a little bit here and a little bit there.”

A haphazard method of retirement planning, to say the least.

“Retirement is just a cash flow problem,” Book said. “Once you have the number (amount of money necessary to retire comfortably with), then you work backward from the number to where you are now. That gives us a road map to determine along the way if you’re winning or losing. If you know where your track is, you can get back on it.”

This dicey market has caused people without a plan to “lose hope. Anything they do could be the wrong thing — so they do nothing,” he said.

Once employees define all the resources they have and understand their 401(k) or other plans and investments, they can determine what’s “the earliest age they could retire; what’s the optimal age they could retire; and what’s the oldest age at which they could work.”

Then they can determine the target amount they need each year to live on.

For instance, if someone needs $75,000 per year to live on today, that would require a $1.5 million nest egg from which to take a 4 percent to 6 percent distribution rate each year.

However, 10 years from now, at a 3.5 percent annual inflation rate, that $75,000 would be roughly $112,000 per year, and require a $2.25 million egg.

Of course, this requires saving and investing money each month — something we’ve all known for years. But according to national savings rate statistics, “we” aren’t exactly saving much, if at all.

“What precludes people from saving the amount they should be?” Book asked. “Debt. A lot of people use the shotgun approach — pay a little extra on each credit card each month, pay a little extra to savings, pay a little extra to the mortgage.”

These are all good ideas, but without a focus, they won’t save enough for retirement.

“They have to make a decision to stop spending beyond their means,” he said. “We’re a debt society.”

Rebecca Tonn covers banking and finance for the Colorado Springs Business Journal.