Man walking on dunes in desert

How Far Can You Go In Helping Your Staff Prepare For Retirement?

In the movie Good Will Hunting, the character portrayed by Robin Williams helps the troubled Matt Damon start to let go of his past by getting in his face and saying “It’s Not Your Fault” over and over again.   (Watch here – profanity warning!)  My message to many employers that have tried, with limited results, to help their employees participate in their retirement plan and prepare for their future is: “It’s Not Your Fault!”  Do you feel better?  Now before you go any further, take a moment to embrace your nearest coworker and let it all out (send them this blog first, though, otherwise it could be awkward).

One of the words that comes up often in forums and presentations and reports on employee participation in employer based retirement plans is apathy.  Most employers struggle with getting their employees engaged in the process of planning for their future.

We have been working directly with employees for 20 years and have learned that, in many cases, there is just nothing you can do for some of your staff.  Some people simply do not take an interest in either participating in your plan or in preparing for their future.   There could be many reasons why and some of it is just not your business.  There might be some variation from employer to employer on this issue, but it is a common problem.

However, if you are seriously interested in helping your staff get the most out of your plan, are doing all you can?  Here are suggestions that we believe you should consider to provide your employees some guidance or assistance in helping them become better prepared for their future: 

AUTO ENROLLMENT AND AUTO ESCALATION

Auto enrollment should be standard in all employers.  These means that all staff is enrolled automatically unless they opt out.  Pick an amount anywhere from 3% to 10% (really, 10%) that all employees will contribute upon eligibility.  Employees can opt out if they like.  Also, if you really want to increase enrollment, force employees to opt out each year.  Auto escalation is another excellent way to help your employees.  This provides each employee the option to choose to automatically increase their contribution periodically, like once a year.  Is there any reason not to offer this?

GUIDANCE AT ENROLLMENT

Provide personal assistance from a human that will help each employee enroll, determine the amount to contribute, and explain the investments.  An experienced professional should help employees navigate through this process and frame how the plan will work for them today and in the future.  By the way, don’t make assistance mandatory.  Some of your employees may decline the assistance if they are comfortable doing it on their own.  Also, make sure that whomever is providing this advice, though, does not try to sell your employees other products during this interaction.

DETAILED PLANNING

Some of your employees may want an opportunity to look at the bigger picture.  How do they balance saving for retirement with their current needs?  What should they prioritize, saving or paying off debt? Should they develop a budget?  When can they realistically expect to retire?  These questions, and others, can be addressed by completing a retirement or financial plan.  Many people struggle to plan or don’t know where to turn for help.  Providing your employees an opportunity to assess where they stand for the future can significantly enhance the value to your retirement plan.   We would also caution you against turning this into an opportunity for an adviser or broker/dealer to sell investment products.

WEBINARS/SEMINARS

Offering your employees opportunities to learn more in an educational format can be somewhat helpful. These are not as effective as one on one encounters, but can be good supplements. Generally speaking, webinars are better than seminars but both can work.  Use topics that can build off of prior sessions.  Try and keep them brief – maybe 25 to 35 minutes – and focused to one or two concepts at a maximum. Also, be sure to review the content of these sessions prior to delivery.  Make sure that they are designed for the rank and file – if you really want to help the employees – and not full of a bunch of industry lingo and jargon.

EDUCATION COMMITTEE

Bigger small companies (if that makes sense) can also set up an education committee that is specifically designed to help the employees.  It can be a part of the Investment Committee or its own committee.  The discussions will cover different ideas and strategies that would help the employees better engage and save more.  It is critical that members include employees from the rank and file.

A SIMPLE MESSAGE – ONCE A YEAR

Send out a message to your staff, once a year, reminding them of the resources available from your organization and that you value helping them prepare for their future.  Let them know that you are open to suggestions to improve the plan if they make sense and are reasonable.  Make sure that this message stands alone – do not include it as part of another communication.

IF YOU ARE PROVIDING SOME OR ALL OF THESE, OR SOME OF YOUR OWN, THENIt’s Not Your Fault”.

WHAT DO YOU THINK?  WHAT HAVE YOU DONE?  WHAT WOULD YOU LIKE TO TRY? 

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401k Fee Target = 0.50% Per Participant

What are your retirement plan fees on a per participant basis?  Do you know? Do you have any idea at all?  What should, or could, they be?  Reports put the averages that employees of smaller employers pay at around 1.30% to 1.45%.

This means that in a plan at 1.40% fees an employee would pay $140/year on a $10,000 account. Of course, plan balances change daily as markets move and employees make contributions.  This also means that as each employees’ account grows their total dollar costs rise at the same rate since they pay their fees as a percentage of assets.  In the same example, if an employee has a balance of $100,000 they would pay $1,400/year in fees.

Since these numbers are average, it would mean that some smaller employers have relatively low cost plans and some have costs approaching 1.80% or greater.   These employees are vastly overpaying for plan services!  In fact, those employers that accept plans that pay the average are doing a horrible disservice to their staff.

A much better – and achievable – average cost for small plans should be around 0.50% per participant.  This would include everything – investment fees, record keeping, and advisory support for the plan.  Advisory support could be guidance for the plan and/or the employees.

Unfortunately, inflated fees fund much of the excess nonsense in the financial services industry. This nonsense, in my view, includes the unnecessary costs of many actively managed funds; the excessive fees for an adviser or broker/dealer to provide guidance to the plan; distribution fees tied to the mutual funds; insurance charges; and some of the “managed” investment programs that are available for or provided to plan participants.

To be sure, many of these plan services are necessary.  They provide real value to the plan sponsors and employees.  But the costs are just too much.   Many industries experience price pressure over time and lower costs with improved technology and more efficient servicing techniques.  However, if plan sponsors don’t demand lower costs why would service providers reduce their pricing?  They won’t.

Employers, particularly smaller firms, should target per participant fees of 0.50% when establishing goals for their plan.  While it might seem odd, and many critics would argue that it is a simplistic approach, it is a great starting point.  This is a realistic baseline that should force providers to offer their services in a more competitive manner.

Some plans that will have a difficult time getting to $.50 per participant.  Plans with many participants and low balance accounts are simply going to have to pay more.   However, these are a small minority of all plans.

What are your fees?  Do you think you can get them to $.50 per participant or even lower?

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The Real World of Smaller Employers

I have been working with smaller employers for 20 years.  I have enjoyed the people I have met and how I have been able to provide service to their organizations.  I am keenly aware of the challenges they face in moving their businesses forward.  There is much to do and limited staff to get the job done.

When I hear of the suggested steps and processes an employer should take, according to many industry practitioners, to prudently manage their retirement plan, I see a huge disconnect between the recommendations and what will ultimately get done.  Smaller firms simply don’t have the time or money for all this.

Unfortunately, too many practitioners in the retirement services industry promote complexity to imply value in their additional costs and services.  But much of this just takes advantage of the vulnerability of smaller firms.  And it really is a shame because in the long run it impacts the quality of life in retirement for their employees.

Smaller employers need help and smart simplicity.  A great way to accomplish this is to simplify the investment lineup and Investment Policy Statement.  Use primarily low cost index funds, eliminate revenue sharing, and reduce fund turnover.  Get rid of the jargon no one understands, endless reports no one reads, and the unnecessary meetings no one wants to go to.  This approach may not be as pristine as those of large or mega employers, but it will still be prudent.

Ultimately, there is no excuse for smaller employers for not adequately meeting their obligations. Their employees rely on them to manage a benefit that is important to their future.  They still have to do their job and protect their employees’ interest first and foremost.   But all of the nonsense fees, conflicts of interest, and complexity doesn’t help and this is something that the financial services industry should not be proud of.

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Statistics and Real People

If you pay attention to any media at all, it is hard to get through the day without hearing of a new survey or statistic about our collective health, eating habits, retirement preparations, school performance, crime rates, and anything else that can be measured.  ”We” are either doing great, improving, or on the edge of a calamity!  What do you think of when you hear these type of reports? Isn’t your instinctive reaction to think about whether or not the results apply to you.  Don’t you say to yourself something like, “Well, that’s not me” or “That kind of fits my situation.” Of course!

By and large, many of us are concerned about ourselves.  This is not selfish or unusual at all and doesn’t make us bad people.  This is not to say, though, that we should not have some concern over how the local, national and international communities that we live and move in are doing.  But aren’t we primarily concerned about how these factoids apply to us?

In my experience, many of these statistics are far too simplistic.  They are general, as you would expect.  The results provide little context – they may not be meaningful in how they impact real flesh and blood people.  You see, the thing about real people is that we make decisions to adjust our life to the changing world around us and to the specific developments that directly affect us.

When it comes to the state of retirement planning in America, it seems as if there is a survey a day discussing the upcoming retirement catastrophe in America.  The reports are that some/many/most Americans have no savings, don’t understand financial matters at all, have too much debt, etc… There are a litany of problems that apparently will have much of society living out their retirement years in despair.

Is this really what will happen?  I am hardly convinced.  Many of these statistics are drawn from surveys in which many of the questions are simply too broad.  For example, these surveys will ask people if they believe they will have enough for retirement or how much planning they have done for their future.  In many cases, people simply don’t know if they are on track so they assume the worst. But just because they have not been planning does not mean they are necessarily in trouble.  Over the years, I have done many retirement plans for people and many of my clients were surprised that they were in far better shape than they anticipated because their expenses were low and under control.

Is it heresy to ask if every single American really needs to do a plan for their future?  Seriously! Keep in mind this is what I do for a living.  I enjoy helping people plan for their future, and feel grateful that it provides me a gratifying career.  I think everyone would be better off if they planned for their financial future and made informed decisions along the way. But not everyone gets around to it.  They just don’t!  Sure, they might make mistakes and it might cost them a bit, but it doesn’t mean, necessarily, that they are going to end up on skid row if they don’t do a financial plan.  Some will muddle through and end up okay.  It may not be the best way to get there, but sometimes that is how life unfolds.

When it comes to the financial future of many Americans, I have concerns that many will not end up with the kind of retirement they want.  However, I think we are far from a retirement catastrophe. (I am actually more concerned about recent college grads, heavy tuition loan amounts, and their bleak prospects for significant and meaningful career opportunities). Many middle aged Americans are able to get their expenses under control and adapt to their situation by modifying their plans and considering work in their future.

Keep in mind that you are, well, you.  You are not an average or a statistic so be careful about how much to read into reports.  Survey stats might be interesting in the aggregate, but they often times are misleading and not necessarily useful to individuals.  Try to avoid the noise and get a handle on your situation – it’s the one that matters most!

What do you think? How do you respond to the daily onslaught of new “surveys”?