Benefits Business

Retirement consulting

Employees and employers are looking for help in this enormous market

By Len Strazewski

Whether or not to provide retirement benefit plan consulting can be one of the most difficult decisions for an independent agency to make. Unlike group health benefits, which tend to be available from a small group of insured health plans in most regions, retirement administration and investment options are offered by a wide range of national providers.

Helping your employer customers make the right choices requires more than basic business analysis and effective annual marketing. Agencies need to provide actuarial professionals, investment counselors and licensed securities dealers. That's a lot of additional expertise for agencies that may have only recently expanded their business from property/casualty insurance sales to employee benefits.

The latest research on retirement benefits, however, reveals that while the issues may be complicated, the potential market is huge for serving both employers and individual retirees. Employees are paying more attention than ever to their retirement plans and contributing more than they have since the recent recession began. However, they also say they are inadequately prepared to make best use of their plans.

As a result, the opportunities are growing for agencies that can provide effective employee benefits communications and individual investment counseling.

The 12th Annual Transamerica Retirement Survey, released in May 2011, is sponsored by the Transamerica Center for Retirement Studies, an independent foundation funded by Transamerica Life Insurance. This year's survey was conducted by Harris Interactive which polled more than 4,000 workers in the United States.

The poll revealed that about 78% of respondents are saving for retirement with employee-funded retirement plans, such as 401(k) defined contribution plans—and the plans are being perceived as more important than ever. About 17% also reported that their employer also provided a more traditional defined benefit pension plan.

More than 92% of respondents rated their defined contribution retirement plans as the second most important employee benefit—just behind group health insurance which was cited by 94% of respondents. Several other benefits were also noted as important, but at nowhere near the same levels. About 79% cited disability insurance, 69% life insurance and 68% long-term care insurance.

Workers are contributing more to their retirement plans and are paying more attention to employer contributions. Employee contributions increased to about 9.8% of annual salary, the highest saving level since the beginning of the recession. And 94% said that an employer contribution or match was important, up from 92% last year.

While workers said they generally felt a little more confident in their ability to retire comfortably—about 51% of respondents in 2011 compared to 50% last year—they also felt less confident that they were saving enough in total dollars. Only 38% thought they were saving enough, compared to 40% last year. And too many—about 23%—fear that they will run out of money before they die.

Help wanted

Despite this new focus on retirement, employees indicated that they need more help in preparing for retirement. About 71% said they don't know as much as they should about investing, up from 68% last year; and about 58% said they would like more information from their employer about how to reach their retirement goals, up from 56% last year.

What happens to the accumulated retirement savings at retirement age? Employees are usually offered two options: take a lump-sum payout, which can be rolled into an individual retirement account until withdrawn, or purchase a guaranteed annuity. In their benefits communications, employers often advise annuities to guarantee life-long income, but they generally do a poor job explaining the advantages.

As a result, annuities are also a thorny problem for retirees and their employers—and a potentially big market for agents who can provide retirement plan consulting. Jerry Levy, a partner and senior consulting actuary at Mercer in Chicago, and Craig Rosenthal, a partner and senior consulting actuary in the Mercer New York office, recently published an advisory bulletin on the use of annuities by late-career retirees and the importance to employers who want to provide secure retirement benefits.

In the report, the consultants said annuities are often underused as retirees make ill-informed choices to take lump-sum payouts from their defined contribution plans.

 "Even though annuities can be structured to provide income protection for a spouse or other beneficiary by adding some survivor protection, most retirees still decide to take the lump sum. In a January 2011 survey, the Society of Actuaries found that only 20% of Americans aged 45 to 70 plan to purchase annuities or other forms of guaranteed lifetime income to protect their assets."

However, the authors note that the decision to buy a retirement annuity is not a one-size-fits-all decision and requires some analysis by experts. The timing of an annuity purchase can have a serious effect on the financial value that a retiree derives from the retirement plan.

The authors note that retirees also have some fears about buying annuities. They fear that if they purchase an annuity and die prematurely, they will "leave money on the table" that is not available to their heirs. Also, they tend to overvalue lump-sum payouts and their ability to manage their investments through the investment market ups and downs.

The role of the employer

Managing these concerns and facilitating timely and efficient retirement for employees becomes a concern for employers, the authors said. Employers have a great need to predict their employment needs and maintain effective levels of trained workers.

"Assuming that demand existed and fiduciary issues were manageable, what's the appeal to the employer? Perhaps the most compelling incentive is to facilitate workforce planning," the report says.

Other incentives for employers include:

— Assisting late-career employees to determine if they have sufficient resources to retire

— Helping retirees to manage the spend-down of assets

— Providing access to group annuity pricing

— Improving the benefit program's brand by delivering a complete retirement solution

"The age at which people are able to retire may be a concern for employers as well, particularly those with aging populations and positions that require unique skill sets. While retirement is an individual decision, employers may want to forecast changes in the workforce due to retirement so that they can determine future hiring needs in order to meet the demand of goods and services in the future. Helping employees select an appropriate retirement vehicle may be one way of gaining a clearer picture of retirement patterns," they wrote.

Large employers are more likely to hire human resource consultants with actuarial practices to help them predict their workforce management issues and retirement patterns, but small employers have more narrowly defined problems. They want to make sure their employees have a secure retirement and get the best value from their accumulated retirement assets. For these needs, they are more likely to turn to their agent who has provided employee benefits advice and counsel in the past and financial products that they trust.

The author

Len Strazewski has been covering employee benefits issues for more than 30 years and is employee benefits columnist at Human Resource Executive magazine. He has an M.S. in Industrial Relations from Loyola University in Chicago.