What the “F” ?
A four part series that will address important themes of plan management
If you’ve stayed with me through this four part series on the critical “F”s in 401(k) plan management (and thank you if you have), then hopefully you will agree that I have saved the best and most crucial “F” for last – Future. When you think about the last three “F”s , funds, fees and fiduciary, they all center around producing the best outcomes for the retirement future of your plan participants. Moreover, the main purpose of the Employee Retirement Income Security Act of 1974 (ERISA) is to protect the assets of millions of Americans so that funds placed in their retirement plans during their working lives will be there when they retire. So much focus is placed on protecting, growing and maintaining the assets during work that it leaves us asking what happens when your participant is ready to retire with those assets that he or she has worked so hard to amass or worse yet, what happens when your employee starts to plan his or her retirement and realizes there is not enough there to allow them to retire.
First let’s focus on how to best assist your employee during their working career to earn, grow and protect their retirement assets. As we have discussed, making sure that the funds in your plan are appropriate to help asset growth, monitoring the fees in your plan to protect against plan asset erosion, and acting in the proper fiduciary manner in order to maintain a compliant plan are all steps that you can take to help your employees while they are participants in your company’s 401(k) plan. Additionally, many retirement plan recordkeepers offer tools and calculators that your participants can utilize to model the potential shortfall or overage that they will have in monthly income during retirement. To clarify, most tools will calculate 75% – 80% of the participant’s preretirement income and turn that into a monthly amount. From there, the tool will analyze how much the participant can expect to generate on a monthly basis from the balance of their retirement account considering both current and future contributions and average market performance. The more dynamic tools will also let the participant enter outside sources of income, model for social security, account for medical expenses, and more. The participant will then be able to fairly quickly determine if they will have an overage or a shortfall in monthly income in retirement. This tool is commonly referred to as “Gap Analysis” and if the plan that you work with does not currently offer something like it, it may be time to consider adding it.
Providing tools like Gap Analysis to your participants is a great first step; however, we believe that it is essential that you take another critical step in assisting your plan participants by offering a dynamic education plan that encompasses both informative group meetings and impactful one-on-one meetings. We believe that our industry as a whole has done a poor job of reaching out to the average participant in a way that makes very difficult and often intimidating financial concepts surrounding a 401(k) understandable. Therefore, we believe in some basic concepts when it comes to educating your participants. The first is a concept in education called “Chunking” whereby a person attempts to make sense of something complex by breaking it down into smaller, more manageable units. We attempt to take daunting items like asset allocation, asset classes, match structures and vesting schedules and explain them in a way that is relatable to most participants. Furthermore, we believe that it is imperative to not only engage the left brain, analytic side of the brain when describing investment concepts, but also to involve the right brain, emotional side to truly appeal to the participant. I’d be willing to bet that you have seen the look before in your employee’s eyes when you start into a dry or, dare I say boring, concept in an employee meeting and immediately the stares glaze over and the head nodding begins. By engaging the creative and emotional side of the brain, we have found that we get a much better engagement and communication in our employee education events which can lead to more action when it comes to making a decision to participate in the plan. Caleb Bagwell, our employee education specialist says, “Participants have been told their entire working life that they need to save. It’s not a foreign concept to them. The problem is that no one has taken the time to show them why! Why should they be using the 401(k)? Why can’t they depend on social security? We need to bridge the gap between the discomfort of delaying gratification now, and the payoff they will receive in retirement, and that bridge is built through education.” I would encourage all of my readers to visit Caleb Bagwell’s blog, Motivated Monday, to learn more about how he is taking a fresh approach to engaging and inspiring employees to take a new look at their retirement futures.
Finally, when it comes to weighing the importance of your participant’s future against the immediate needs that are constantly pressing, we urge you to consider the potential cost that employees who cannot afford to retire may have on your business’s bottom line. We know and fully appreciate that there are situations where the experience, knowledge and wisdom that comes with long time employees cannot be replaced, but we are also fully aware, as should you be, that the more senior the employee the greater the potential for higher costs associated with that employee. These costs can include anything from greater absenteeism to higher salaries to increased medical costs. Case in point, we have a business contact who hired a practice manager over 6 years ago to streamline their operations in anticipation that many of the staff members that currently served in administrative roles would soon be retiring. Flash forward to today and that company now has the highly paid practice administrator that they hired 6 years ago along with all of the other 9 employees that were planning on retiring who cannot because they cannot afford to. This is an all too real situation that many companies find themselves facing, but we believe with proper education it can possibly be avoided.
John Adams, our second President, said “There are two educations. One should teach us how to make a living and the other how to live.” We could not agree with this statement more whole-heartedly when it comes to educating employees about their retirement futures. It is absolutely a balance between making your living and living the life you want now and in the future. If you feel like there may be a better way to help your employees achieve the future that they want, we’d love to hear from you.
Jamie Kertis, AIF®, QKA
Retirement Plan Specialist
Grinkmeyer Leonard Financial
1950 Stonegate Drive / Suite 275 /Birmingham, AL 35242
Office: 205.970.9088 / Toll-Free: 866.695.5162
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