Financial security in retirement is one of our nation’s cornerstone principles when it comes to the way we have come to envision quality of life from cradle to grave. With this in mind, Social Security has long been considered the safety net for most Americans in retirement. In recent years, however, the perception of Social Security has evolved from a “safety net” or supplemental income, to a program that (in the eyes of many, at least) should serve as the primary source of retirement income.
This has not gone unnoticed by members of the current workforce, who worry that Social Security will not be there for them, and they wonder if any retirement savings vehicle in which they participate is an effective way to plan. To be sure, the future of retirement planning is now at a crossroads.
It is important to distinguish between public sector and private sector workers on the issue of retirement planning. According to the Center for State & Local Government Excellence, 80% of public workers still have a defined benefit (DB) pension plan, while just 10% of private sector workers have the same kind of benefit.
The question is, is this a good thing or a bad thing for those private sector workers? Consider a study from James Poterba, Steven Venti, and David A. Wise published in the Proceedings of the National Academy of Sciences (PNAS) Journal (8/14/2007). It estimated that the present value of future remaining DB benefits for a worker age 65 and the average account balance for 401(k) participants also age 65 would be very similar in 2009.
While we must understand that since the study was conducted, the recession had a serious impact on all investments. Still, as the recovery continues, and assuming 401(k) participants stayed the course, recovery of their full account balance was within sight by the first quarter of 2010.
The bottom line is that 401(k) plans are still viable options when compared to DB plans. This leads to the issue of whether an enhanced 401(k) approach is better than a government-based approach that could involve the expansion of existing government programs.
As a 30-year retirement planning industry veteran, I remain confident in the potential of private sector options and ability to choose how retirement savings are invested. Everything we need, from technology to business models, already exists and is accessible. Our job is to make sure we implement the appropriate changes to reengage the current workforce as it plans for its retirement years.
Within the profession, the first priority is to avoid conflicts of interest under ERISA. In addition, we need to think and act comprehensively, making sure that we conduct ourselves with both business success and the common good in mind.
The 401(k) benefit needs to evolve from its current status as a voluntary employer-offered employee savings plan into a complete retirement-planning vehicle. Plan sponsors must take the lead role, maintaining high levels of accountability and transparency, while helping participants make informed decisions. Plan sponsors should expect the highest levels of service and guidance from advisors.
And they must demand lower administrative costs. For their part, participants can no longer sit back and let others decide for them. They must be involved in the decision making and management of their own retirement savings plans.
In the end, if we do not achieve these things, we can expect the government to intervene with its own Social Security-style solutions, most based on the assumption that 401(k) plans will not work.
John Adams, one of the nation’s Founding Fathers and its second president, once said, “Facts are stubborn things.” In that pioneering spirit, let’s consider a few facts before exploring what needs to be done to ensure a more secure retirement for millions of Americans.
• There are now more than 400,000 401(k) plans currently existing in the private sector.
• A 2006 Harris Interactive Poll for the American Institute of Certified Public Accountants found that 23% of Americans have not yet begun to save for retirement.
• 75% of employees have saved less than a $10,000 balance, according to an Employee Benefit Research Institute’s “2006 Retirement Confidence Study” (conducted in partnership with Matthew Greenwald and Associates).
• According to this same study, more than half of workers age 55 or older have less than $50,000 saved for retirement.
• 73% of plan participants say they aren’t overly confident in their investing abilities, according to a 2006 survey by The Scarborough Group.
• Plan sponsors are under more pressure to maintain their business competitiveness, global viability, bottom-line profitability, and enterprise value.
• Several new regulatory mandates address fee transparency and reporting, revenue-sharing disclosure, and investment advice at both the plan sponsor and participant levels and place greater emphasis on sponsors addressing their overall and expanding fiduciary responsibilities and corresponding liabilities.
There’s an old medical saying, “Physician, heal thyself.” If we are to do just that, then consider the following:
1. Employers, the planning industry, and government must together communicate to plan members the value of a 401(k) option as part of the larger compensation package. Participation needs to be understood as imperative to long-term financial security.
2. Keep it simple. Never forget the power of incremental improvements, even of 1 percent. When we improve returns, improve portfolio allocations, and manage costs, we dramatically improve the chances for greater returns.
3. Eventually, plans should give participants computerized, automatic analysis with estimates for future balances and income. This will make it easier for participants to plan by illustrating the benefits of planning and participation, compared to the risks of not doing so.
4. Auto-enrollment should be the industry standard and be implemented everywhere but where it may not be logistically possible. This will help increase participation rates and effectively counter problems tied to the voluntary enrollment process. With recent legislation allowing for increased use of auto-enrollment, this may prove to be one of the most important steps toward improving the nation’s retirement savings than anything else.
5. The plan sponsor should consider a reasonable and consistent employer contribution every year. This sends the message that the benefit is an important part of compensation, but also provides significant incentive for participation. It also helps discourage “competition” from any form of government solution. Employers can take advantage of newer plan designs that are flexible and effective.
6. Plan sponsors should engage an ERISA 3(21) or 3(38) fiduciary service provider which is obligated to act in the plan’s and participants’ best interests and is legally liable when it doesn’t. This reduces liability exposure to the plan sponsor and its representatives. It is important that a professional or a firm with the right expertise be engaged to provide proper measurement and evaluation tools as the system is implemented and monitored going forward.
7. An open architecture investment platform should be used when possible to give access to funds made available to retirement plans via the Defined Contribution Clearing and Settlement (DCC&S) system of the National Securities Clearing Corporation (NSCC).
8. The investment menu accessible through an open architecture platform should feature low-cost index options, along with actively managed options to allow for active and passive approaches to investing.
9. Participants must be educated on why they will continue to need the support and guidance of investment professionals. Professionals should manage the retirement accounts to ensure that the latest tools, monitoring, and evaluation instruments are used to manage funds. Institutional strategies are based on more sophisticated metrics supported by back-tested analysis to heighten the confidence level of achieving expectations.
10. Consider the case for a multifamily asset allocation approach, which is managed by a professional advisor or firm. As far as I can tell, no single investment firm or mutual fund family has ever claimed best-in-class performance superiority or expertise in every single asset class or category.
11. Employers, sponsors, and participants would benefit from the ability to give participants direct access to personalized investment advice and counsel. Through a personal relationship with a financial advisor, participants will gain a sense of hands-on management of their portfolios while at the same time benefit from the experience and guidance of an experienced professional. Access is possible on a number of levels, from face-to-face meetings to Internet or telephone connections.
12. Fee transparency and disclosure must be paramount. Investment platform providers should have systems in place for full accountability, and should report any applicable revenue-sharing arrangements. Full fee disclosure is the right thing to do. In order to maximize the benefits of competition, it must be possible to identify and compare costs. Fees should be detailed to assess value delivered and opportunities for cost-reduction.
The future of retirement planning is at a crossroads. In order to create financial security for private sector employees through 401(k) plans, we will have to bring the vision, help set the priorities, and provide flawless execution.
I suggest the best solution is a collective one, where we address the issues identified here collectively all toward the same goal, which is to create an improved retirement planning atmosphere which warrants government support but not government intervention.
Before us is the task of providing for Americans a reasonable expectation of financial security well into our retirement years and well into the 21st Century and beyond. To this end, the constructive evolution of the 401(k) plan has to be a critical part of the conversation.
– by Jeffery A. Acheson, QPFC, Schneider Downs Wealth Management Advisors, LP
Jeff Acheson, QPFC, is partner/managing director, Retirement Plan and Executive Benefit Services at Schneider Downs Wealth Management Advisors, LP, in Columbus, Ohio. He can be reached at 614-586-7259 or at jacheson@schneiderdowns.com.