Benefits Business

Retirement planning—what now?

Advisors prepare for a critical period with new products, priorities and legislation

By Len Strazewski

It’s probably the worst time in decades to be in the retirement benefits business. But it may be the best time to get ready for the retirement benefits business as it starts to evolve. Expect new retirement products, changes in plan design and a total overhaul of tax policy that will affect what you tell your retirement clients.

Retirement certainly has everyone’s attention. With the financial markets dipping to a 10-year low earlier this year, employees are watching their defined contribution plan balances drop to fractions of their former glory—and are necessarily rethinking their strategies for personal retirement.

Can they afford to retire? Should they try to stick out the equity markets plunge? Should they try to “stop the bleeding” by switching their balances to fixed income funds or annuities?

Employers, too, are forced to focus on retirement plans. Top executives have the same concerns as their employees—and even more so since their starting balances were higher and may have dipped deeper. And faced with sinking business revenues in the recession, employers may be reconsidering the role retirement plans play in their company’s recruitment and retention strategy.

Should they lower or end their defined contribution plan matches? Should they change the mix of investment options to provider “safer” bond funds or fixed income financial products? Will they have fiduciary liability risks from angry employees who feel they should have had better protection from the recession and its effects?

A new survey commissioned by Workplace Options in Raleigh, North Carolina, a work-life service company, reports that half of the respondents are stressed about making ends meet, and 59% are concerned that money from their pensions and 401(k)s won’t be there when they need it. The research, which was conducted by Public Policy Polling earlier this year, polled a national sample of 568 adults.

“Anxiety over personal finances and the security of retirement savings is causing significant stress for many workers, particularly as the threat of layoffs looms on their minds,” says Dean Debnam, chief executive officer for Workplace Options. “When employees are stressed about their future, it makes it harder for them to perform well on the job, often putting them in the line of fire for criticism from their supervisors. This, coupled with financial worries, can spell disaster for a worker’s emotional and physical well-being, as well as overall productivity.”

There are no easy answers for these real concerns, employee benefit consultants say. According to recent research from Hewitt Associates in Lincolnshire, Illinois, retirement plan participants have fallen further behind than ever before in saving for their retirement goals and expected lifestyle.

In 2008, the consultants estimated that employees need to replace more than their total pre-retirement income—as much as 126%— to meet their needs and expectations for the future, accounting for inflation and increases in medical costs. At that time, Hewitt says, an analysis of 72 large U.S. employers and their 2 million employees indicated that workers were on track to replace an average of only about 85% of pre-retirement income.

Since then, the gap has widened. Factoring in a conservative market downtown of 18%—most people have seen much worse—workers are now tracking to replace only 81%.

“Most Americans were already far from achieving adequate levels of retirement income before the economy collapsed, and for many, the financial downfall has made reaching these goals nearly impossible,” says Rob Reiskytl, the company’s leader of retirement plan strategy and design.

However, there are ways to help, with encouragement, investment education and some plan design changes, he says. “In today’s economy, employees are stretched to their limit. But the key is for workers to keep saving and to make sure they are using all of the tools and resources they have at their disposal to maximize their retirement saving potential.”

Employees may need a refresher course in their benefits—especially employer matches. If employees don’t maximize what they can get from their employers, they are leaving money uninvested for their future, Reiskytl says. If employers don’t already provide retirement calculators and Web-based investment research, they need to do so immediately.

According to Hewitt research, about 38% of large employers provided third-party advisory services in 2008 and another 43% planned to add them this year. Smaller employers should follow that lead.

Reiskytl also says advisors should recommend automatic enrollment and contributions to help employees capture retirement funds. That can be a tough sell to some employees who say they don’t have the time or interest to sign up for payroll deduction—especially those in Generation Y who haven’t begun to focus on retirement that is 30 years or more away.

Reiskytl further encourages employers to provide more diverse investment options, including specialty funds that target retirement dates and automatically restructure portfolios as employees come closer to retirement. Plan participants in these funds who were close to retirement would have lost less in the equity markets if their funds shifted toward more conservative investments before the crash.

There is also some encouragement for retirement business in President Barack Obama’s economic stimulus package, according to industry lobbyists. Money for jobs and income tax changes as well as promises of health care reform got most of the attention, but retirement is still part of the program.

The legislation, signed into law in February 2009, increases the credit for contributions to defined contribution plans and Individual Retirement Accounts.

“The president’s proposals also acknowledge the vital importance of retirement security for American workers and for the economy as a whole,” says James Klein, president of the American Benefits Council in Washington, D.C. “The Council strongly supports improved opportunities for retirement saving. The president’s proposals to expand the Saver’s Credit and facilitate enrollment in workplace plans and IRAs are intended to achieve that goal. As with the president’s health care proposals, the Council looks forward to examining the details of these proposals,” Klein says.

However, the group’s preliminary analysis notes that the stimulus package neglects some relief for defined benefit pension plans. Pension funding hasn’t been wounded as badly as defined contribution plans, but funding levels have still dropped significantly.

Defined benefit plans are now the most secure employee benefit because they are employer-funded and few employers let equities dominate their investment portfolio. Also, these pension benefits are insured by the Pension Benefit Guaranty Corp. in Washington, D.C.

But the drop in funding levels still poses long-term problems, industry leaders say.

According to Klein: “Since the beginning of the economic downturn, the Council has advocated defined benefit funding relief to sustain traditional pension plan sponsorship and aid struggling companies. Additional relief is still urgently needed to preserve plans, benefits and jobs.”

Change is coming and agents and brokers should get ready to provide advice on how best to fix the damage and apply the remedies when they become available.

The author
Len Strazewski has been covering employee benefits issues for more than 20 years and is employee benefits editor of Human Resource Executive magazine. He has an M.A. in Industrial Relations from Loyola University.