Building Retirement Solutions For Your Workplace – Steps To A Secure Retirement
Parker Elmore, ASA, MAAA, EA, FCA | Sarah F. Rothenberg
As 401(k)’s become the predominant form of retirement benefits, many employees find themselves facing an uncertain future. The crux of the problem lies in the fact that few employees know how to convert their 401(k)’s into a steady income stream. Nor do they know how much money they need to save for retirement.
There are many advantages to a more financially secure workforce for employers and employees alike. According to the Consumer Financial Protection Bureau, 70% of employees say that financial concerns are their greatest source of stress. Financial stress can lead to distraction on the job, absences, a sicker workforce, and a higher turnover rate. Furthermore, today’s workforce places a great deal of importance on a company’s benefit package. Implementing retirement solutions can help employers attract and retain top talent while also rewarding loyal employees.
So how can you lead your employees to a more certain future?
According to a recent MetLife study, 55% of retirees are concerned that they will outlive their retirement savings. Yet most retirees lack the financial knowledge to understand how much money they need to retire and how to successfully manage their savings both before & after retirement. A financial wellness program can provide employees the tools they need to better manage their retirement via financial awareness campaigns, computer modeling, expert coaching, etc. Topics of interest may include, but are not limited to, short and long term saving goals, managing debt, budgeting, and protecting against financial risks.
- Ease of Use
One of the greatest obstacles facing employees in saving for retirement is inertia. History has shown that plan sponsors that automatically enroll employees into their 401(k) plans (employees may then opt-out) have a much higher participation rate than those that require employees to affirmatively enroll into their plans. Furthermore plan forms that are short and easy to understand encourage employees to participate and play a more active role in their plan. Consider setting default options that will benefit the greatest number of employees while complying with your fiduciary obligations to assist employees that are not active in your plan. Most employers currently offer a lump sum rollover into an IRA as the default option for new retirees. However, a rollover into an IRA is potentially costlier than allowing the former employee to remain in the employer’s plan (new DOL Fiduciary regulations may make it more likely terminated employees will remain in your plan).
- Waiting Periods
Nearly half of employers impose a waiting period for employees to participate in their 401(k)’s. The delay is often 6 months or longer. This may lead to lower rates of participation, as orientation is often the easiest time to encourage employees to fill out the paperwork for their 401(k) plan. Given that an average person will change jobs 11 times during their lifetime, the impact of these various waiting periods after each job change means a significant loss of retirement savings ability during their working career (the more job changes, the greater forgone savings opportunity).
- Retirement Income Generator
Traditionally 401(k)’s were designed to supplement employees’ pensions. As such most 401(k)’s lack retirement income generators (“RIGs”), which help turn 401(k)’s from lump sums into lifetime income streams. Plan sponsors and governing bodies are beginning to recognize the importance of RIGs while they increase in popularity.
Plan sponsors may want to consider integrating RIGs into their plans with a retirement income menu that allows employees to choose a RIG much like they choose their investment strategy. There are a wide variety of RIGs. The right RIG is dependent on the needs of both the employee and the employer. Some considerations are the amount of income the solution will generate, the employees’ ability to access retirement savings, protection from market volatility before & after retirement, longevity risk, and the cost if any for the employer. Below are a few strategies to consider.
i. Withdrawal Options
A series of payments from a participant’s account. These may be a fixed amount, a fixed percent of the account or variable. These payments may be designed to stretch over the participant’s lifetime. Another strategy is to design an option such that an employee may take larger withdrawals immediately upon retirement in order to delay taking social security, resulting in larger social security payments in the future. Regardless of the design, there is no guarantee that the account will last the retiree’s lifetime.
Annuities offer guaranteed payments for a set period of time or for a participant’s lifetime. They are typically offered through an insurance company. Consider a longevity annuity where the employee pays a lump sum in exchange for a guaranteed lifetime income stream that begins at a later point in time. Qualified longevity annuities satisfy required minimum distributions (“RMDs”) so long as the participant begins collecting the income by age 85 and the annuity does not cost more than the lessor of 25% of the participant’s account balance and $125,000. Alternatively a participant may purchase a single premium immediate annuity. This works much like a longevity annuity however the payments begin no later than one year after the purchase of the annuity. A single premium immediate annuity will satisfy RMDs.
iii. Systematic Withdrawal Plans
A systematic withdrawal plan liquidates a participant’s assets, typically from a mutual fund, as needed such that the participant withdraws a fixed amount of money at specified intervals. Participants may invest their savings on their own or as part of a managed payout fund. A systematic withdrawal plan may be designed to last a participant’s lifetime, however there are no guarantees.
iv. Investment Income
An employee may invest in a diversified portfolio and then live off of the investment earnings, never drawing from the principle. A participant needs a large amount of savings in order for this to be a viable option. Furthermore the participant is dependent upon favorable investment returns in order to avoid drawing on the principle.
Employers are facing a workforce that is increasingly dependent upon their 401(k)’s for retirement security. The current model for 401(k) plans may have been adequate in the past. But does it meet the needs of today’s workforce? Consider whether there measures that you could take to better meet your needs and those of your participants.