From the retirement plan consultant’s perspective, there are two key constituents in our business: the organizations that sponsor retirement programs and the people that participate in them. Mostly, the various objectives of these two are aligned, but occasionally there can be conflicts. A Plan Sponsor has limited financial resources to apply to managing and sponsoring a retirement program and a plan participant has limited resources to apply toward their personal retirement savings program.
Let’s start with the sponsor. A business owner, CFO or HR Manager typically acts as the plan fiduciary/plan sponsor. Most US retirement plans are subject to ERISA, a body of regulations that make up the highest fiduciary standard in the land. Plan sponsors are personally liable for fiduciary breaches under their watch, so there is a financial incentive for an ERISA fiduciary to do the job right. Many, perhaps most, aren’t even aware this is so. Our industry has been running a marathon of teaching this point for nearly two decades, leading the charge with FUNDS, FEES, FIDUCIARY. While it is important, and plan sponsors should know their duties, it has become something of a “cry wolf” situation where all of us are fatigued and really don’t want to hear it, or say it, anymore.
It’s not that the plan sponsor doesn’t care about the 3 Fs-they do. Its likely more that these are basic table stakes -all plan advisors worth their salt provide fiduciary oversight of the investments, fees, and processes. The best also find a way to engage employees, drive participation and contribution rates higher, improve investment decision-making at the participant level and expected income replacement rates at the aggregate, plan level. It’s this last point that really matters.
What is an “Income Replacement Rate” and why should a sponsor or participant care about this metric? This is how we measure if a plan is achieving its objective of replacing a participant’s income when they stop working. We measure it as percentage of pre-retirement gross income. A generally accepted target replacement rate is 70%, including Social Security. We’ll pick up this thread again later when we address Financial Wellness from the participant’s perspective. For the sponsor, this metric might be considered a valid measure of ROI on the retirement program. If an employee population is largely on-track for income replacement success, this contributes to reduced financial stress and improves morale in the workforce. If a sponsor can achieve this and meet all their responsibilities under the 3 Fs, some would say this is a Plan Sponsor Success.
If leading with the 3 Fs is now largely ignored, then how do we tee-up these conversations? What’s our hook up-front and our differentiator on-going? The purest of plan consultants don’t work with participants and stay squarely in the middle of the “plan-level only” lane. Many small and mid-size plan advisors claim to service the participant, but they don’t really have the scale and are just trying to sift out the high-net-worth participants so they can cross-sell them on wealth management services. Due to advances in technology, we are now able to scale delivery of a financial plan to each participant via a downloadable app.
So, from the sponsors view, if your ROI is largely based on whether your people are financially prepared to retire when they reach retirement age, then you want this. Perhaps even more important, you want your employees to be aware that they are on-track to retire on-time and that it is largely due to an employer provided benefit. We refer to this reduced-stress, financially secure, “I know I’m on track” state of mind as “Financial Wellness”. The employer wants it because it translates into a more focused, healthier, and more loyal workforce. This is the Holy Grail for retirement plan sponsors.
At the participant level, many have never explicitly heard the “income replacement rate” definition, nor have they tried to determine how much they’ll need to accumulate or how much they need to be saving today to get there. Since our retirement system, including the 2 most common types of plans, 401(k) and 403(b), is a participant directed system, participant behavior has an enormous impact on plan success and achievement of appropriate income replacement rates. Because of this dynamic, we posit that a consultant that only provides plan-level services is only doing half the job. Participant engagement, deferral rates, investment selection/asset allocation are all important in determining the ROI of the plan.
Risk management via appropriate fulfillment of fiduciary duties is paramount to a plan sponsor, but just doing these things alone doesn’t achieve plan success. A plan needs to have reasonable expenses, competitive investments and appropriate plan design and it needs to be properly administered. Without genuine employee engagement, strong participation and contribution rates and sound investment decision making, a retirement plan just won’t be successful. We believe that engaging all employees in the financial planning process, teaching them how to behave to be financially successful and showing them where they stand in relation to their goals and then what to adjust if they aren’t on track are all requisite to plan success.
Here at Asset Strategy, we provide the MyWealthGuide financial planning app to all employees of our plan consulting clients. We back it up with a staff of financial planners so that your employees can speak with a professional when they need help. Further, we host a dedicated Retirement Academy Website for each employer that features educational resources and guides, easy access to our contact information, recordings of past presentations and a direct link into a planner’s calendar to make it easier to book time with us. If any of what is described here seems like more than you are getting from your current retirement plan providers, then we would love to hear from you.
John is the Director of Retirement and Senior Consultant at Asset Strategy.
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