Retirement planning

With 43 percent of US workers having less than $10,000 saved for retirement, America is facing a retirement crisis. HRM asks a panel of experts for their thoughts on planning for the golden years.

The demographics of the workforce are changing significantly as younger people enter the workforce. Does this new workforce require a different approach to retirement planning?

Dale Magner. As younger workers enter the workforce, they will have to deal with many of the same issues that their parents and older colleagues had to contend with such as paying bills, reducing debt, saving for a house, planning for retirement. This generation has seen what their parents have gone through when years of careful financial planning have been wiped out in a matter of weeks or days from the financial crisis of 2008 or the dot.com bubble in 2000. They have lived through the mortgage crisis and their own families may have been affected by it. This generation of workers will be more careful not to repeat the mistakes of the past and will plan early and be more diligent about overseeing their retirement plans. They are also a generation that has grown up with technology and will be more likely to depend on online tools and resources for information and services.

Tom Kmak. Indeed it does. Over the next 20 years, 70 million workers will reach retirement. Many of these workers will choose to retire in a traditional way that has them sitting on the beach playing with their grandkids. Others, however, will find such a concept of retirement unappealing. In fact, a recent AARP study shows that 70 percent of retirees want to continue working to some degree. While the primary reason they will continue working is additional income, it is also clear they want to work because they find it stimulating.

Thus employers will realize they have a younger workforce that is arriving and an older workforce that is semi-retiring. As such, these employers will structure attractive part-time programs with benefits to make sure they retain these older workers, which in many cases represent extremely valuable assets. In summary, while we currently have a problem with too many workers and too few jobs, that situation is likely to reverse itself as the baby boomers reach retirement age.

John J. Kalamarides. We’re seeing an increasingly diverse workforce, with established employees working longer and younger workers entering the workforce. What this means is that a “one size fits all” approach no longer works. For younger workers, automatic features are the key to getting them on the path to a secure retirement. Auto enrollment, contribution escalation and defaulting into a qualified investment are all important elements in jump-starting the right behaviors. Younger generations also tend to be more “plugged in”, so we’re exploring innovative ways of delivering education and communication through the web, mobile devices and in social media settings. Looking forward, the next big question will be whether to default these workers into guaranteed retirement income solutions.

Jon Prescott. The basic premise of retirement planning that all young people entering the workforce should follow hasn’t changed since the dawn of retirement planning. That message is this: “Start early. The best thing you can invest in your retirement account is time.” And automatic enrollment is great for getting new employees into the plan and keeping them there. Having said that, though, employees of all ages need to understand how much money they will need in retirement, and then choose a game plan they can live with and stick to it. Many service providers offer valuable internet-based tools that help participants determine not only what they need, but their investment style and asset allocation, as well.

There has been a huge amount of economic uncertainty over the past few years. Is this making a difference in the way individuals and organizations plan for retirement?

TK. Indeed. Numerous surveys have shown that employees are less confident about retirement than ever before. These same surveys show, however, that as many as seven out of 10 Americans have no idea how much money they will need for retirement. Think about that for a moment. ERISA was passed over 35 years ago and 70 percent of all employees still have no idea how much they need for retirement – quite likely the most expensive thing they will ever purchase. And, the longer they wait to answer that question, the less time they will have to make any necessary course corrections.

The good news, however, is the industry is starting to realize that while retirement confidence is nice, retirement competence is better. In fact many companies are starting to focus on the key question of “what is winning” for our industry by examining the concept of retirement readiness. Whether it is the ING commercial with a person walking around with a big orange number under their arms, or a Fidelity commercial encouraging a person to follow their green arrow path to retirement, the industry is finally realizing that retirement readiness is the key metric that should be benchmarked for success in our industry.

JK. The financial crisis has demonstrated that sequence-of-return risk grows exponentially with age. In other words, it’s much harder to recover financially if the market drops right before you’re poised to retire. We believe that guaranteed retirement income is the right solution. For example, our guaranteed income product protects investors in the critical years before retirement, while still allowing them to capture market upswings. We find that the peace of mind of knowing you won’t outlive your income is very valuable to individuals, especially with the average retirement lasting longer than ever.

JP. It couldn’t help but make a difference. Many employees who have been laid off over the past few years have been left with no alternative but to live on what they were saving for retirement. As they go back to work or find new employment, they are starting over at ground zero when it comes to retirement savings. Employers want education programs that address these issues and provide meaningful, realistic solutions. They also want investment options that cover the style boxes, including income and stable value options.

More employers are also aware of the value of the fiduciary protection afforded them by operating their plan to comply with §404(c). Employers who are not, should contact their service providers to find out what §404(c) means in their specific situation.

Kurt Shallow. The world’s financial markets have been beset by turbulence. Even after a strong rally last year, the average annual returns of stocks are still below water for the past three to five years. And almost daily, economic news seems to send skittish financial markets on a rollercoaster ride.  In an ever-changing regulatory and tax landscape, new plans and options crop up endlessly. Many tried and true approaches to investment savings have been turned upside down or replaced by new alternatives. It’s clear that now more than ever, both the design and management of qualified and non-qualified retirement plans depend more on strategies than individual products.

The advantages of a holistic approach to retirement planning are clear. The comprehensive approach Guardian has developed blends best practices and new innovations in funding vehicles for retirement plans that can help employees attain their retirement goals.

What kinds of options are available to employees and organizations when it comes to choosing retirement plans? Do different solutions offer particular upsides and downsides?

JK. Since the advent of the Pension Protection Act, we’ve seen a dramatic increase in the use of target date funds. We believe they are a great asset allocation solution. But we also believe that the ultimate objective of retirement planning is to get participants through retirement, not just to it. So Prudential has begun offering the next-generation target date fund, which includes an optional guaranteed income component. In addition to ensuring adequate diversification through one’s investing years, this solution also delivers a retirement ‘paycheck’ for life.

JP. Many of the options for the type of retirement plan have not changed in quite some time. Profit sharing, 401(k), 403(b), 457(b), and nonqualified deferred compensation plans all have unique features that allow employers to create the retirement plan that works best for their organization. Some of these plans are for certain types of entities, of course, but within each, there are options available for refining the plan even further.

For example, employers have always loved the way a 401(k) plan allows employees to participate in the process of saving for retirement, which is a definite “upside”. However, the owners and officers of the company may find that they are limited in what they can contribute because of 401(k)’s nondiscrimination testing – a definite “downside”. Safe harbor provisions may be an appropriate option, or maybe an integrated plan design, or perhaps safe harbor with an integrated plan design.

There are numerous options for each. The employer’s service provider should be able to help determine the best alternatives to achieve the employer’s goals for the plan.

DM. There is no one-size-fits-all retirement plan. Different individuals have different needs and expectations. Guardian has developed a suite of retirement products to address the many and varied needs of our clients. Our team of retirement experts can evaluate your needs and provide a range of ideas appropriate for your situation.

We are also at the forefront of new product development. Cash balance plans are defined benefit retirement plans that offer sizeable tax deductions to small- and medium-sized businesses and can help clients rebuild retirement savings after the turbulence of 2008. For the appropriate situations, cash balance plans can make sense since they’re easy to understand and can furnish participants with a guaranteed accumulation. They’re also flexible and can help control costs. Two Guardian group retirement products, The Guardian Choice and The Guardian Advantage, offer clients a variety of options to help fund cash balance plans.

KS. Guardian also offers more specialized plan funding components designed to complement the retirement needs of your company’s most important executives and managers and reduce taxes at the same time. One option, Guardian’s corporate-owned variable life insurance (COLI ) policy can serve several functions. Before retirement, with your company named as primary beneficiary, COLI offers protection on the lives of key employees. Using life insurance to fund the plan offers additional tax advantages to the company, as policy cash values accumulate income tax-free. It can also help offset the plan’s costs and help your company recover the costs spent on employee benefits.

What role does education play in helping people make preparations for life after work?

JP. Education is key to the success of any retirement plan. Not only does it help employees use the plan to their best advantage, it also increases the employees’ appreciation for the employer and the retirement benefit provided to them. Education and outside guidance give employees the knowledge and the tools they need to make informed decisions so they can look forward to retirement with confidence.

Guardian Life. The better informed an individual, the more likely he or she will select the appropriate solution for his or her retirement needs. Guardian’s team can provide education to our clients so they make the right decision for their situation. Of course, Guardian is there to do more than evaluate. We’re well equipped to make a difference even after our evaluation is complete and our suggestions have been made. We have a nationwide network of representatives to help you with your decisions in addition to trained professionals who can answer questions and provide information to enrollees.

TK. Having been in this industry for 25 years, it is apparent that education alone will not suffice. We have had prospectuses, enrollment kits, videos and colorful brochures for decades. We have had more participant meetings than you can imagine. Yet we still have 70 percent of the employee population with no idea how much they need to retire, 30 percent don’t even contribute to these programs, and in some cases over 50 percent of employees spend their pre-retirement distributions when they change jobs. So, obviously, it is time to change the beat.

In that regard, instead of trying to change the behavior of one participant at a time through education, we should use plan design to influence tens or hundreds or thousands of participants. This means we should take advantage of lessons we have learned from the field of behavioral finance to smartly install features like auto enrollment and auto increase to improve contributions. We should also default people into managed investment programs that make sure employees have the appropriate mix of cash/bonds/stocks. These programs also include proven useful features like automatic diversification and automatic rebalancing.

Or put another way, some people say the definition of insanity is doing the same thing over and over again and expecting a different result. While there is no doubt we can continue to innovate on the margin with education, the real progress will be made by using plan design to simply “do it for them”. After all, we increasingly live in a fast food society where you barely have time to attend your child’s baseball game. Thus, we should not expect employees to pore over a myriad of information to become experts in investments, finance or retirement.

JK. We believe that retirement education must be a lifelong commitment. The process of saving for retirement spans many years, and requires different information and guidance at different stages. Regardless of the stage, however, participant education needs to be simple, relevant and actionable. For example, we include retirement income projections on all of our participant statements, along with access to our retirement income calculator (RIC). Experience has proven that this is the most effective method of driving participants to take action. In fact, 21 percent of participants who utilize the RIC take action – with 16.7 percent increasing their deferral rate an average of 4.7 percent ($2800 annually).

The Panel

John J. Kalamarides is Senior Vice President of Retirement Strategies & Solutions for Prudential Retirement. In this role, he has overall management responsibility for the organization’s Full-Service Defined Contribution, Full-Service Defined Benefit, Institutional Income, Stable Value, Retirement Plan Strategies, and Capital Markets businesses.

Tom Kmak is CEO/co-founder of Fiduciary Benchmarks (FBi), which provides benchmarking of fees and services for defined contribution plans through advisors/consultants, recordkeepers and other service providers. Prior to founding FBi in October 2007, Kmak served as CEO of JPMorgan Retirement Plan Services.

Dale Magner has been in the retirement plan industry for over 25 years. He joined Guardian in 2008 to develop and manage the company’s external retirement plan wholesaling operations and expand the distribution strategy of Group Retirement Solutions to all distribution partners. In this capacity, Magner is responsible for the strategic direction and growth of Guardian’s retirement initiatives. 

Kurt Shallow has more than 26 years of industry experience in underwriting, product development and marketing. As Vice President of Risk Products Distribution at Guardian Life Insurance Company of America, Shallow is responsible for all wholesaling of risk products (Life, LTC, IDI and Executive Benefits).

Jon Prescott, Chief Marketing Officer for CPI Qualified Plan Consultants, Inc., is a Fort Hays State University graduate with Bachelor of Science degrees in Marketing and Finance. For the past 32 years, Prescott has held personnel management, sales management, general management and executive positions for service, wholesale and retail corporations.