How to Take Control of Your 401(k)
Originally posted August 27, 2013 by Scott Holsopple on https://money.usnews.com
A recent survey by Charles Schwab of 1,000 401(k) participants said that 52 percent of those polled find their 401(k) plan more confusing than their health insurance benefits. That's pretty impressive, given that I don't think I know anyone who claims to understand their medical coverage. Fifty-seven percent desired an easier way to choose their 401(k) investments.
Despite the bad press the 401(k) plan sometimes receives for its complexity and for requiring plan participants to become investors whether they want to or not, the fact remains that it is a great way to save for retirement. For many people, it's their only retirement savings vehicle. Sure, if you don't have much interest in investing and finance, you might find it confusing to manage your account — but it's up to you to do something about it.
Being a 401(k) plan participant requires you to take charge of your retirement saving and investing, so don't let confusion or uncertainties leave you on the sideline. Instead, here are five things you can do to step up:
- Embrace the power and control you have, and think hard about how to use it. Spend some time seriously thinking about your retirement saving and investing needs. Jump on some educational websites and do some reading to familiarize yourself with basic investing terminology and the types of investments to which you have access.
- Take action by creating a retirement saving and investing plan. Outline the amount you plan to contribute now and in the future in order to reach your retirement goals.
- Take advantage of your 401(k) plan's features. Many plans offer ways to maximize your participation such as an employer match, educational resources and advisory services that can help you pick the right funds to support your retirement goals.
- Check to see if your plan offers an auto-increase contribution feature, which automatically increases your contribution rate by a small amount each year (or more frequently, if you like). If your plan doesn't offer auto-increase set up calendar reminders and increase your contributions yourself. Either way, you need to save as much as you can and regular contribution increases can help you get there.
- Once you've established your strategy, stick to it. Paying too much attention to market fluctuations can cause some investors to run scared. A long-term view is what's needed, rather than concentrating on your account balance on any one day.
The 401(k) plan might not be perfect, but you stand to gain a lot when you take advantage of being in the driver's seat — just a little know-how can make a big difference when it comes to your 401(k) and financial future.
Time’s running out to start a new Safe Harbor 401(k) plan for 2013
Originally posted August 26, 2013 by Jerry Kalish
Back in April, I wrote that the Retirement Plan Season Starts Now.
“Now” literally means now for an employer who wants to start a new 401(k) plan this year and take advantage of special tax rules that allow the plan to automatically pass the 401(k) discrimination tests.
Historically, many calendar year end companies have waited until late December to establish a new retirement plan. Employers have said “as long as my plan is in place by December 31, can’t my company consider the entire year for purposes of contributions and tax deductions?”
The answer to which is generally “yes” for most types of retirement plans, but there is a big exception for new Safe Harbor 401(k) plans.
October 1 is the due date for an employer to establish a new 401(k) plan using those special “Safe Harbor” contribution rules to permit owners and other Highly Compensated Employees to maximize their contributions regardless of how much the Non-Highly Compensated Employees contribute.
It works something like this. The employer can make one of two types of Safe Harbor contributions:
- 3% of compensation for all eligible employees, or
- Matching contribution of 100% of the first 3% of an employee’s contribution, and 50% of the next 2% of an employee’s contribution. Thus, if an employee contributes the full 5%, it will cost the employer 4%.
Bottom line: Owners and other Highly Compensated Employees would be able to defer the entire $17,500 maximum plus an additional $5,500 for those over age 50…and also receive the Safe Harbor contribution.
How is this possible if a plan is established on or before October 1? It’s simply that the 401(k) individual limit is a personal calendar year limit even though the 401(k) plan would have been in effect for less than the full year.
Here are the four things needed to get done on or before the October 1, deadline.
- The TPA provides a plan document.
- The employer establishes a trust account.
- The advisor helps the employer select a 401(k) provider.
- The adviser helps communicate the plan to the employees.
There is still time for an employer to establish a new 401(k) plan, and maybe even qualify for the retirement plan start-up tax credit.
This article is for general information and discussion purposes only. Employers and employees should always seek the advice of experienced tax advisors for the application of the tax rules to their specific situation.
Investors Seek Help With 401(k) Plans, Survey Finds
Originally published August 26, 2013 by Mary Ann Tasoulas on https://www.financial-planning.com
This according to a nationwide survey of more than 1,000 401(k) plan participants, commissioned by Schwab Retirement Plan Services. Respondent findings show a high level of self-reliance. Approximately nine in 10 (89%) say they will be responsible for coming up with the money to support themselves in retirement. Five percent indicated that their financial help will be provided by the government upon completion of their full time employment.
This self-reliance is fueled by the anticipated use of 401(k) plans.
• 61% report the 401(k) is their only or largest source of retirement savings
• 55% have increased their savings rate in the last two years
• 70% say their 401(k) is in better shape now than ever before
“It’s gratifying to see so many people taking the reins of their retirement,” said Steve Anderson, head of Schwab Retirement Plan Services in a statement. “In our view, contributing to a 401(k) plan should be the number one savings priority for workers. Planning ahead, taking action and getting the help you need along the way are key steps to help build sufficient retirement savings.”
UNSURE HOW TO INVEST
The survey reveals that saving in a 401(k) is not enough to instill confidence for many participants.
• 52% find their 401(k) investment explanations even more confusing than that of their health care benefits (48%)
• 57% would like an easier way to figure out what 401(k) investments are right for them
• 46% don’t feel they know what their best investment options are
• 34% feel a lot of stress over correctly allocating their 401(k) dollars
SEEKING HELP
Many 401(k) plans offer some type of professional advice, which can be instrumental in helping people take better control of their investments. Of those surveyed, 61% want personalized investment advice for their 401(k). Participants requested the need for guidance on everything from asset allocation to risk tolerance and retirement income planning.
First and foremost, the survey showed that investment confidence nearly doubled when workers have the help of a financial professional. Approximately one-third (32%) of survey respondents expressed confidence in making the right 401(k) investment choices based on their own ability, compared to 61% if they also had the help of a financial expert.
“Getting more workers engaged in professional 401(k) advice should be a top priority for employers. We’ve seen the positive impact it can have on both behaviors and outcomes,” said Anderson. “At Schwab Retirement Plan Services, Inc., participants who used third-party, professional 401(k) advice tended to increase their savings rate, were better diversified and stayed the course in their investing decisions,” he said in the same statement.
6 solutions to the retirement crisis
Originally posted by Paula Aven Gladych on https://www.benefitspro.com
Chad Parks, president and CEO of The Online 401(k), wants to find a solution to the retirement crisis in America. He and some colleagues drove cross-country last year interviewing people from all walks of life about their retirement savings and their ability to retire. They put their findings into a film called, “The Looming Retirement Crisis in America.”
After doing his research, Parks believes there are six major obstacles to retirement in America, but the good news is that there are also solutions.
(By the way, if his solutions seem a bit obvious to you, it’s because you’re in the business and have been paying attention. And if that’s the case, Parks’ list could only help you make your case with prospects).
Coverage
According to Parks, people need to save at work but to do that, they need an employer that offers a retirement plan. More than 40 million workers cannot save at work because they don’t have access to any sort of plan.
The solution? Mandated retirement savings plans, like auto IRAs, USA Retirement Accounts, 401(k)s and others.
Participation
Getting people to actually save money can be difficult. Some individuals won’t save for retirement even if they have access to a work-based plan.
The solution? Automatic enrollment. Features like this, added to an existing 401(k), have been shown to improve participation rates because the number of people who opt out of plans after being automatically enrolled is very small.
Saving enough
Many people don’t save enough for retirement and, even if they do save, they never increase the amount they save over their lifetime. A lot of workers save 3 percent their entire working lives, which isn’t enough to provide lifetime income in retirement.
The solution? Automatic escalation. Plans that offer this feature have had great success in building employee account balances. Every year, automatically, these plans increase employees’ deferrals into their retirement savings plan by at least 1 percent. The goal is to have everyone save between 10 and 15 percent of their pay in retirement savings over time.
Investing appropriately
Workers need to invest their money appropriately for their age, their ability to take on risk and with current market conditions in mind, according to Parks.
The solution? Cost-effective professional advice. Studies have shown that workers who confer with a financial professional save and invest more appropriately for their own situation than those who don’t work with an advisor.
Accumulation/adjustment
Accumulation of money is not the only goal, according to Parks. It also is important to adjust a person’s savings as their life changes.
The solution? Regular annual checkups. Plan participants should revisit their accounts at least once a year to make sure they are in the right investments and not taking on more risk than they can handle.
Retirement/decumulation/lifetime income
Many investors continue to invest in riskier options well into the years when they should be scaling back on the risk and preserving their savings. They also don’t know how to prudently “decumulate” their money and haven’t explored lifetime income options.
The solution? According to industry experts, many retirement plans don’t advise individuals to annuitize even if it would be in their best interest to do so. Instead, they handle longevity risk by setting a higher age for the end of the planning period. Seeking advice about annuitization can help individuals decide whether purchasing an annuity for guaranteed lifetime income is a good option for them.
DOL changes timing of required employer 401(k) and 403(b) disclosures
Originally published by Brian M. Pinheiro and Robert S. Kaplan on https://ebn.benefitnews.com
The U.S. Department of Labor yesterday released Field Assistance Bulletin 2013-2 granting employers that sponsor participant-directed individual account plans (such as 401(k) and 403(b) plans) the ability to delay this year’s disclosure of annual investment-related information to plan participants and beneficiaries. Employers were required to provide the original notice by August 30, 2012. The DOL regulations require that the notice also be distributed “at least annually thereafter.” This means each annual notice would have to be distributed within 12 months of distribution of the prior year’s notice.
Critics of the annual notice requirement have complained that August does not correlate with any other annual participant disclosures for calendar-year retirement plans. Consequently, the DOL is permitting employers a one-time delay in distributing the annual notice. For 2013, the plan sponsor may wait up to 18 months from the date of distribution of the prior notice to distribute the new annual notice. This delay will allow employers to put the annual notice on the same schedule as other annual participant disclosures, such as notices for Qualified Default Investment Alternative or safe harbor status.
Recognizing that some employers have already prepared or mailed notices in anticipation of this August 2013 deadline, the DOL also permits employers who do not take advantage of this relief during 2013 the same 18-month period for 2014 annual notices.
Most third-party administrators and vendors prepare these annual notices for employers. Employers should keep in mind that the notice is an obligation of the plan sponsor and not the vendor. Plan sponsors should carefully review the notice to ensure that it is accurate and meets all legal requirements.
Retirement across America: Lessons learned
Originally published July 19, 2013 by Chad Parks on https://ebn.benefitnews.com
For six weeks last spring, I traveled across the country filming interviews for an upcoming documentary called Broken Eggs: The Looming Retirement Crisis in America. I am executive producing the film, which is an honest, unfiltered look at the state of retirement in our country.
We set out to learn more about how Americans view retirement and whether or not the looming retirement crisis is as serious as we feared.
It was an eye-opening experience that discovered some bright spots, as well as some really life-altering and depressing stories.
After having had a year to reflect on the initial trip as we near the film’s completion, I wanted to share with you, my industry colleagues, the four lessons I learned on this journey.
Lesson 1: People are aware of the problem
One preconceived notion I had before going on the trip was that Americans were blissfully unaware of the retirement crisis. I figured few knew that Americans are $6.6 trillion short of what they need to retire. In fact, most are acutely aware of the hurdles they’re facing. Unfortunately, that doesn’t mean they’ve changed. Most are unsure of what to do and are overwhelmed, which leads to inaction being their only action. But this crisis is on their minds — and they want a solution.
I’m encouraged to see this issue hasn’t fallen by the wayside, but the challenge is to get Americans to take action.
Lesson 2: Our industry is in a bubble
Sure, we all know what the terms “401(k),” “intelligent design,” “automatic enrollment” and “model portfolios” mean. But after this trip, I can say that it’s a foreign language to everyone outside our retirement industry bubble. We’ve done a fantastic job of complicating things, and the fallout is that there is a severe disconnect.
What are we trying to accomplish by hiding behind jargon? In order to begin to solve this problem, we need to simplify retirement and humanize it. Perhaps there’s a universal way to gamify this problem in order to engage more people. Some have proposed a retirement scorecard, while others suggest the “set it and forget it” plan. Regardless, we need to get out of our bubble and understand that people are busy and not experts in retirement.
Lesson 3: Retirement income is grossly misunderstood
Though I found that Americans are aware of the retirement crisis, many believe that Social Security will bail them out. I encountered far too many people who are counting on Social Security as their primary or only retirement income vehicle.
As you well know, Social Security exists to make sure our seniors aren’t destitute – not so they can comfortably retire. With Social Security slated to be insolvent in about two decades, our industry needs to educate plan participants on what Social Security can do – and more importantly, what it can’t do.
We must stress that the three-legged stool of retirement no longer exists, and the one leg that is left is not Social Security (or a pension); personal savings is what will fuel retirement now and in the future.
Lesson 4: There is not a single, simple solution
If there was a solution to this problem, it would have already been implemented. In addition to interviewing everyday Americans, I spoke to industry thought leaders and influencers from across the spectrum, including Brian Graff of ASPPA and Teresa Ghilarducci from The New School.
In order to curb the looming retirement crisis, we can’t rely on a one-fix solution. My hope is that putting forth a blend of ideas will ultimately become a reliable solution.
We can never get to that point, however, unless we start discussing this problem. And I’m not referring to talking amongst ourselves. We need to engage our customers, the American people, and drill this problem into their heads.
As an industry, we need to do a better job of setting the pace for this discussion, which must be personalized. And instead of just talking at people, we must listen, and ultimately educate. Part of the solution is to use Americans’ first-hand experiences planning for retirement to help craft solutions.
My hope is that Broken Eggs ignites a conversation among all American to solve the problem. It’s raw. It’s honest. And these stories deserve to be heard.
Will U.S. workers ever be able to retire?
Original article from usatoday.com
Despite the rebound in home prices and new all-time nominal highs in the stock market, many Americans are looking at an unpleasant retirement, if they even make it that far; according to the Employee Benefit Research Institute's latest survey on retirement confidence, the majority of workers have saved for their golden years, but the piggy bank is quite slim.
Excluding the value of a primary home and any defined benefit plans, 57% of households say they have less than $25,000 in savings and investments, while 28% say they have less than $1,000. Furthermore, the Center for Retirement Research at Boston College has warned that 53% of American households are at risk of not having saved enough to maintain their living standards in retirement.
Americans are still planning for retirement, but, as one would expect, how they have saved for retirement depends very heavily on age and on pre-retirement income.
Compared to other countries' retirement systems, that of the United States doesn't stand up well. In a recent report, the Mercer consulting firm and the Australian Center for Financial Service, gave the United States a "C" grade, a rating considerably worse than the A received by Denmark and the B-plus given to the Netherlands' retirement system, which combines a Social Security-like fund with a nearly universal pension system to which employers contribute. The study showed plainly that many other countries are more willing than the United States to mandate unpleasant steps by workers and employers to fund a stable system.
The United States does have some mandates; employers must pay 6.2% of each employee's salary into Social Security, and every employee must also contribute that amount. But the Social Security system faces the threat of a huge shortfall. One-third of America's retirees get at least 90% of their retirement income from the program, with annual benefits averaging a modest $15,000 for an individual.
Another important pillar of America's retirement system, the 401k, is voluntary and generally not accessible to low-wage workers, who may not have the income necessary to invest. Although some employers have embraced automatic enrollment for their workers, more than 58% of American workers are not in a pension or 401k plan. Those employees with such plans, whose payouts are dependent on contributions and investment returns, are exposed to the risks associated with the stock market, which after the financial crisis were quite great.
The problems associated with these two primary means of saving dictate which financial sources fund the retirements of lower-wage workers and higher-wage workers. Gallup's annual Economy and Personal Finance poll, conducted between April 4 and April 14 of this year, sampled more than 2,000 adults to discover how non-retired Americans expect to fund their retirement. The results show that expectations varied significantly by annual household income. Upper-income retirees primarily said that investments, such as 401ks, or individual stock investments would fund retirement, while lower-income respondents said that Social Security and part-time work would be major sources.
In fact, of those respondents earning $75,000 or more per year, 65% said that retirement savings accounts would be the "major source" of retirement funds, and only 17% said Social Security. Comparatively, 42% of respondents earning less than $30,000 per year said Social Security would be a major source of income, 27% said work-sponsored pension plans, and another 27% said part-time work.
Younger generations of workers, particularly the 18 to 29 year-old bracket exhibited uncertainty about the future of the Social Security. Gallup found that only about one in five young adults expected to receive a Social Security benefit when they retire. Fifty-three % of respondents from the youngest age group said that they expected to fund their retirement through 401ks, while 49% said savings accounts or CDs and 24% said part-time work.
When looking at retirement strictly through the lens of age, the poll's results show the changing nature of retirement funding. Young respondents are looking to sources outside of Social Security to support them after they stop working, but those nearing retirement age now see Social Security contributing significantly to income — the program is essentially tied with 401k plans as the top source among 50 to 59-year old non-retirees, and it is the number one source among non-retirees aged 60 and older.
New IRS Plan Correction Program Effective April 1
Source: https://ebn.benefitnews.com
On the last day of 2012 the IRS updated the Employee Plans Compliance Resolution System (EPCRS), published as Rev. Proc 2013-12. The program allows plan sponsors to declare, fix and pay penalties (where applicable) for certain operational or demographic missteps under the “voluntary correction program” (VCP).
The revisions, effective April 1, “include changes and additional guidance with respect to correction methods as well as procedural changes for VCP submissions,” according to a client bulletin by the law firm Drinker Biddle. According to that document, authored by Sharon L. Klingelsmith and Heather B. Abrigo, changes to the program include the following:
Corrective contributions for excluded employees in 401(k) plans. “Previously all corrective matching contributions and, if the plan used nonelective contributions to satisfy a safe harbor, all corrective nonelective contributions, related to missed deferrals for an excluded employee were required to be made in the form of a qualified nonelective contribution ‘(QNEC)’ which is a nonforfeitable (i.e., fully vested) contribution. Except for corrective matching and nonelective contributions used to satisfy the safe harbor requirements under section 401(k)(12) of the Code, contribution in the form of a QNEC is no longer required for corrective matching and nonelective contributions,” according to the authors.
Overpayments from defined contribution plans. “If a defined contribution plan overpays benefits, in most cases, the plan sponsor must request that the participant return the overpayment to the plan. Rev. Proc. 2008-50 provided that the participant should repay the overpaid amount with appropriate interest but that the employer was required to make up any amount not repaid by the employee with interest at the plan’s earnings rate. Rev. Proc. 2013-12 now also requires the plan’s earnings rate to be used for participant repayments. In addition, if the reason for the overpayment is the lack of a distributable event, the plan sponsor is not required to make a contribution to the plan even if the participant does not repay the overpayment,” Klingelsmith and Abrigo write.
Finding Missing Participants. “The IRS has discontinued the IRS Letter Forwarding Program as a method for finding lost plan participants who are owed retirement plan benefits. Rev. Proc. 2013-12 provides the following methods to locate missing participants should certified mail not result in success: (i) Social Security letter forwarding program; (ii) a commercial locator service; (iii) a credit reporting agency; or (iv) Internet search tools.”
These changes offer a glimpse of the complete Drinker Biddle report, which advisers may wish to call the attention of their clients.
ERISA Bonding - Not as Easy as it Looks
Separating ERISA bonds from fiduciary liability insurance
Source: https://roughnotes.com
By Michael J. Moody, MBA, ARM
The Employee Retirement Income Security Act (ERISA) has been the law of the land since 1974, with regard to employee benefits. Its specific purpose is to protect the assets of millions of American workers so that funds are available when they retire. It's a federal law that, in essence, sets minimum standards for private company pension plans. Most of its requirements took effect on January 1, 1975. While it does not require corporations to create pension plans, it does establish minimum standards for those that do start pension plans.
For the most part, the key sections of the law have remained as they were in 1975. One section (Section 412) has been a source of concern for employers and their insurance agents because it deals directly with the Act's bonding requirements. In response to numerous requests, the Department of Labor, which oversees ERISA, published a Field Assistance Bulletin (#2008-04) that addresses a number of issues surrounding the bonding requirements. While the Bulletin is helpful in understanding the requirements, it was not meant to change any existing parts of Section 412. The Bulletin provides a set of 42 questions and answers that address many of the areas where employers have requested further clarification.
ERISA Bonding 101
At the most basic level, the bonding requirements are pretty straightforward. The Act, for example, requires that "every fiduciary of an ERISA-covered employee benefit plan and every person who handles funds or other property of such plans must be covered by a bond." There are, however, a number of exceptions to this requirement, as there are with most of the other specific requirements and, as such, are beyond the scope of this article. What follows, however, are a number of requirements that generally apply in all situations.
Bond limits must be issued for at least 10% of the amount of the funds handled, subject to a minimum limit of $1,000 per plan and a maximum of $500,000 per plan.
Several other points to keep in mind regarding the bonding requirements:
• Bonds cannot be obtained from just any bonding or insurance company. They must be placed with a surety company or reinsurer that is listed by name on the IRS's Listing of Approved Sureties as noted in IRS Department Circular 570.
• No plan or party-in-interest may have any control or significant financial interest in the surety or reinsurer, or in an agent or broker who arranges for the bond.
• Bonds must be written for a minimum of one year. Additionally, the bond must also have a one-year period after termination to discover losses that occurred during the original term of the bond.
• Coverage from the bond must be from the first dollar of loss; thus, the bond cannot have a deductible feature.
• An employee benefit plan can be insured on its own bond, or it can be added as a named insured to an existing employer bond as long as it satisfies ERISA's minimum requirements.
Other than the requirements noted above, the DOL allows quite a bit of flexibility with the bond. For example, a plan may be covered under a single bond or one bond that covers multiple plans. Permissible bond forms can range from individual, named schedule, position schedule or even a blanket bond.
Potential trouble spots
One area of considerable confusion that has continued to exist since the original Act was passed is the difference between an ERISA bond and fiduciary liability insurance. ERISA bonds are in fact fidelity bonds that protect the plan against fraud or dishonesty by individuals who handle plan assets. These bonds are a specific requirement of the ERISA legislation. On the other hand, fiduciary liability insurance generally protects the employer and/or fiduciaries from losses due to a breach of fiduciary duty. While fiduciary liability insurance is not a requirement under ERISA, many employers have chosen to provide this important coverage in their corporate insurance portfolio. To complicate the situation further, the insurance industry offers both the bond and fiduciary liability coverage under a single policy. While this type of comprehensive protection is very useful, it needs to be remembered that only the bond is required under ERISA. Additional coverages are available at the discretion of the employer.
Due in large part to the types of risks involved, there are few risk mitigation strategies that can be employed to lower the risk of loss. However, one method of risk mitigation that is being used and suggested by some consultants revolves around "credentialing" of all internal personnel and outside service providers. Typically this approach will require an approval and adoption of a written policy statement. The key element would be conducting criminal background checks and other prudent investigations to reconfirm the suitability of individuals serving in fiduciary positions or otherwise acting in a capacity covered by ERISA's bonding requirements. Care should be taken to comply with the applicable notice and consent requirements for conducting third-party background checks under the Fair Credit Reporting Act and other applicable laws.
While this may initially appear to be overkill, it should be remembered that ERISA generally prohibits individuals convicted of certain crimes from serving as plan fiduciaries. Further, it also prohibits plan sponsors, fiduciaries or others from knowingly hiring, retaining, employing or otherwise allowing these convicted individuals to handle plan assets for the 13-year period after the later of their conviction or the end of their imprisonment.
Additionally, the credentialing process should also include a review that verifies the sufficiency and adequacy of the bonding that is in effect for both internal personnel as well as outside service providers. Unless a service provider can provide a legal opinion that adequately demonstrates that an ERISA bonding exemption applies, plan sponsors and fiduciaries should require the third-party service provider to provide proof of appropriate bonding that is in compliance with ERISA and other appropriate laws.
Conclusion
While there are some exceptions to ERISA's bonding requirements, the fact remains that a bond is required for every pension plan. The bond must extend coverage to those persons whose position requires them to come in direct contact with or exercise discretion over plan assets. Further, the bonds must be in amounts and form acceptable to the DOL. They must comply with all the provisions as outlined in Section 412 of the ERISA legislation.
Fiduciary liability insurance is not required by ERISA, but it can provide agents and brokers with an excellent opportunity to broach the subject with an employer. Losses following the recent financial crisis have increased, and today's fiduciary liability policies offer a variety of coverage enhancements and can provide an employer with a number of advantages, while covering many gaps in their corporate insurance programs. Becoming a key knowledge source for employers in a narrow area such as this can be a real door opener for any agency.
Want to engage in retirement planning? Watch your words
Source: https://eba.benefitnews.com
By Margarida Correia
If you want to engage investors in the retirement planning process, avoid talking about “financial planning” or worse, “retirement income.” Both elicit very negative responses from investors, Timothy Noonan, managing director of Capital Market Insights at Russell Investments, said at a media roundtable this month.
When investors hear “retirement income,” they think they’re about to be sold an insurance product and are reminded of their private retirement “sins,” such as not saving enough or robbing their 401(k)s, he said. And the mention of financial planning is likely to make most investors yawn. The topic is boring and technical, according to a two-year study of major markets in the United States, Canada and the U.K, commissioned by Russell.
HR/benefits professionals should talk instead about “lifestyle design,” a concept that appeals to investors. “If you want a get a disengaged person to re-engage, maybe you should try talking to them about what you can do to help them design a lifestyle that’s sustainable,” Noonan said.
Russell Investments has taken the research to heart, naming its recently launched retirement planning tool the Retirement Lifestyle Solution and the tool’s main software component Retirement Lifestyle Planner. The new tool is based on the concept of adaptive investing, a style of investing that investors are responsive to, according to the two-year study.
Investors see adaptive investing as a middle ground between the investing style extremes of changing asset allocations frequently and not changing them at all. More importantly, it incorporates “asset-liability matching,” which is central in getting “individual investors to engage meaningfully on preparing for their retirement and getting income from their retirement portfolios,” Noonan says.
“Fundamentally, adaptive investing is managing your portfolio and building an asset allocation that is connected to the spending it has to support,” says Rod Greenshields, consulting director of Russell Investments’ private client consulting group.
One of the major roadblocks to getting investors to think about and plan for retirement is their inability to visualize themselves in the future. By matching their assets to their liabilities in the future, the tool helps investors overcome this visualization difficulty, according to Noonan.