Five steps to becoming a trusted retirement plan adviser
Discover creative ways to deliver the best retirement plan to your employees with these five steps in retirement plan advising.
Many trends within the employee benefits industry challenge advisers to think creatively on behalf of their clients. For instance, millennials are more likely to pay off student loans and less likely to contribute to their company’s 401(k) plan. They lose the benefit of compound interest over all those years to retirement, which over decades, can amount to up to 80% of a millennial’s nest egg.
When companies experience low participation rates with new hires, the overall health of the plan will suffer and many of the more highly compensated and key employees may not be able to defer as much as they would like into the plan. Advisers must develop relationships with business owners to establish customized retirement plans that work best for their and their employees’ needs.
When advisers overcome these challenges they expand their client base and move toward success. The following five steps will help retirement plan advisers bring their career to the next level:
Understand the fiduciary requirements and minimize the risk of the employer
Strive to impart knowledge on the employer and the participants to make them confident in their retirement plans. Company owners will feel more comfortable if an adviser helps to reduce the fiduciary risk associated with the creation and ongoing operation of a plan. Advisers can share and even take over most of the fiduciary responsibility with the employer to lessen the pressure. With the right information, a business owner can understand the requirements of the plan and is motivated to establish a 401(k) or other type of plan for the benefit of their employees and overall business objectives.
Know the best plan options for the companies you’re serving
Not every company should have a 401(k) plan. While 401(k) plans may be optimal for large and even small companies, small companies may benefit from other types of plans. Small businesses often operate at a loss or minimal profit for many years before they generate significant profit. As a result, business owners may seek a plan — such as a defined benefit plan — that allows them to contribute more toward their retirement. In some cases, this may more than triple the amount of yearly contributions an employer can make compared to a 401(k) plan. Employers can contribute to a defined benefit plan and take a tax deduction equivalent to the contributions made to the plan.
Understand the tax advantages of retirement plans
Successful plan advisers should understand the tax advantages associated with the chosen retirement plan for both the owners and the participants. Traditional 401(k) plans tend to provide the most benefits to employees with tax-deferred contributions. On the other hand, small company owners can benefit from the tax advantages of properly designed cash balance or defined benefit plans. These frequently overlooked plans enable employers to deduct the cost of the company’s plan from their taxable income to secure tax savings.
Employee benefit advisers must have this foundational understanding of the tax advantages to successfully serve their clients. Partner with a retirement company record-keeper and a third-party administrator to learn the details for each option.
Discover profitable prospects among small companies too
Many employee benefit advisers in search of success avoid talking to small companies. However, these small companies have significant potential and are vital to success in an otherwise crowded market. Small companies, even with only three to five employees, are great to work with, especially if you help them establish a defined benefit plan, and if it’s the best plan for them. Through these plans, retirement plan advisers can receive the fees needed to provide the service because the company is making larger contributions than to a profit sharing or 401(k) plan.
Target underserved, yet vibrant markets
According to a recent study from the Pew Charitable Trusts, only 53% of small to midsize companies have retirement plans in place. Owners may think they are too small to be able to afford and monitor a program. These businesses are important prospects to pursue. Make yourself known to these companies and show the employer that there is a retirement plan that will work for their employees and company, no matter the size. Explain what program the company can implement and easily administer with your guidance.
Small companies provide great opportunities for advisers to become successful and differentiate themselves from other industry professionals. Keep in mind that these small companies are also more dependent on advisers because of the costs and risk associated with retirement plans. They will require more frequent contact for advice and personalized service. If you do not have the right expertise in the beginning, partner with someone in your office or a TPA until you have the credentials and knowledge to advise small companies on your own.
SOURCE:
Weintraub, M (19 June 2018) "Five steps to becoming a trusted retirement plan adviser" [Web Blog Post]. Retrieved from https://www.employeebenefitadviser.com/opinion/five-steps-to-becoming-a-trusted-retirement-plan-adviser?brief=00000152-146e-d1cc-a5fa-7cff8fee0000
The Retirement Readiness Challenge: Five Ways Employers Can Improve Their 401(k)s
Originally posted October 20, 2014 on www.ifebp.org.
Today, nonprofit Transamerica Center for Retirement Studies® ("TCRS") released anew study and infographic identifying five ways employers can improve their 401(k)s. As part of TCRS' 15th Annual Transamerica Retirement Survey, this study explores employers' views on the economy, their companies, and retirement benefits. It compares and contrasts employers' views with workers' perspectives.
"As the economy continues its prolonged recovery from the recession, our survey found upbeat news that many employers are hiring additional employees. Moreover, they recognize the value of offering retirement benefits," said Catherine Collinson, president of TCRS.
Seventy-two percent of employers have hired additional employees in the last 12 months (compared to only 16 percent that say they have implemented layoffs or downsizing). Among employers that offer a 401(k) or similar plan (e.g., SEP, SIMPLE), the vast majority (89 percent) believe their plans are important for their ability to attract and retain talent.
Retirement Benefits and Savings Are Increasing (Yet More Can Be Done)
Employers are increasingly offering 401(k) or similar plans to their employees. Between 2007 and 2014, the survey found that the percentage of employers offering a 401(k) or similar plan increased from 72 percent to 79 percent. The offering of a plan is highest among large companies of 500 or more employees (98 percent) and small non-micro companies of 100 to 499 employees (95 percent) and lowest among micro companies of 10 to 99 employees (73 percent).
During the recession and its aftereffects, many 401(k) plan sponsors suspended or eliminated their matching contributions. Plan sponsors that offer matching contributions dropped from 80 percent in 2007 to approximately 70 percent from 2009 to 2012. In 2014, the survey found that 77 percent of plan sponsors now offer a match, nearly rebounding to the 2007 level.
"Despite the tumultuous economy in recent years, 401(k) plan participants stayed on course with their savings," said Collinson. According to the worker survey, participation rates among workers who are offered a plan have increased from 77 percent in 2007 to 80 percent in 2014. Among plan participants, annual salary contribution rates have increased from seven percent (median) in 2007 to eight percent (median) in 2014, with a slight dip to six percent during the economic downturn.
Workers' total household retirement savings increased between 2007 and 2014. The 2014 estimated median household retirement savings is $63,000, a significant increase from 2007, when the estimated median was just $47,000. Notably, Baby Boomers have saved $127,000 (estimated median) in household retirement accounts compared to $75,000 in 2007. "For some workers, current levels of retirement savings may be adequate; for many others, they are not enough," said Collinson.
Five Ways Employers Can Improve Their 401(k)s
"401(k)s play a vital role in helping workers save and invest for retirement," said Collinson. "Until every American worker is on track to achieve a financially secure retirement, there will be opportunities for further innovation and refinements to our retirement system."
The survey identified five ways in which employers, with assistance from their retirement plan advisors and providers, can improve their 401(k)s. Plan sponsors are encouraged to consider these enhancements to their plans:
1. Adopt automatic plan features to increase savings rates
"Automatic enrollment is a feature that eliminates the decision-making and action steps normally required of employees to enroll and start contributing to a 401(k) or similar plan," said Collinson. "It simply automatically enrolls employees. They need only take action if they choose to opt out and not contribute to the plan."
The percentage of plan sponsors offering automatic enrollment increased from 23 percent in 2007 to 29 percent in 2014. Plan sponsors' adoption of automatic enrollment is most prevalent at large companies. Fifty-five percent of large companies offer automatic enrollment, compared to just 27 percent of small non-micro companies and 21 percent of micro companies.
Plan sponsors automatically enroll participants at a default contribution rate of just three percent (median) of an employee's annual pay. "Defaulting plan participants into a 401(k) plan at three percent of annual pay can be very misleading because it implies that it is adequate to fund an individual's or family's retirement when in most cases, it is not," said Collinson. "Plan sponsors should consider defaulting participants at a rate of six percent or more of an employee's annual pay."
"Automatic increases can help drive up savings rates: Seventy percent of workers who are offered a plan say they would be likely to take advantage of a feature that automatically increases their contributions by one percent of their salary either annually or when they receive a raise, until such a time when they choose to discontinue the increases," said Collinson.
2. Incorporate professionally managed services and asset allocation suites
Professionally managed services such as managed accounts, and asset allocation suites, including target date and target risk funds, have become staple investment options offered by plan sponsors to their employees. These options enable plan participants to invest in professionally managed services or funds that are essentially tailored to his/her goals, years to retirement, and/or risk tolerance profile.
Eighty-four percent of plan sponsors now offer some form of managed account service and/or asset allocation suite, including:
56 percent offer target date funds that are designed to change allocation percentages for participants as they approach their target retirement year; 54 percent offer target risk funds that are designed to address participants' specific risk tolerance profiles; and, 64 percent offer an account (or service) that is managed by a professional investment advisor who makes investment or allocation decisions on participants' behalf.
"For plan participants lacking the expertise to set their own 401(k) asset allocation among various funds, professionally managed accounts and asset allocation suites can be a convenient and effective solution. However, it is important to emphasize that plan sponsors' inclusion of these options, like other 401(k) investments, requires careful due diligence as well as disclosing methodologies, benchmarks, and fees to their plan participants," said Collinson.
3. Add the Roth 401(k) option to facilitate after-tax contributions
"Roth 401(k) can help plan participants diversify their risk involving the tax treatment of their accounts when they reach retirement age," said Collinson. The Roth option enables participants to contribute to their 401(k) or similar plan on an after-tax basis with tax-free withdrawals at retirement age. It complements the long-standing ability for participants to contribute to the plan on a tax-deferred basis. Plan sponsors' offering of the Roth 401(k) feature has increased from 19 percent in 2007 to 52 percent in 2014.
4. Extend eligibility to part-time workers to help expand retirement plan coverage
"Expanding coverage so that all workers have the opportunity to save for retirement in the workplace continues to be a topic of public policy dialogue. A tremendous opportunity for increasing coverage is part-time workers," said Collinson. Only 49 percent of 401(k) or similar plan sponsors say they extend eligibility to part-time workers to save in their plans.
"Employers should consider consulting with their retirement plan advisors and providers to discuss the feasibility of offering their part-time workers the opportunity to save for retirement," said Collinson.
5. Address any disconnects between employers and workers regarding benefits and preparations
The survey findings revealed some major disconnects between employers and workers regarding retirement benefits and preparations. For example: Ninety-five percent of employers that offer a 401(k) or similar plan agree that their employees are satisfied with the retirement plan that their company offers; yet, in stark contrast, only 80 percent of workers who are offered such a plan agree that they are satisfied with their employers' plans.
"Starting a dialogue between employers and their employees could help employers maximize the value of their benefits offering while also helping their employees achieve retirement readiness," said Collinson. Just 23 percent of employers have surveyed their employees on retirement benefits and even fewer workers (11 percent) have spoken with their supervisor or HR department on the topic in the past year.
