2016 has been a year of uncertainty for the 401(k) industry, as issues like the impact of the DOL’s fiduciary rule are still uncertain — especially given comments suggesting that President-elect Trump may scrap it. This tumultuous time may cause some to question if it’s even worth continuing to stay in the industry. For providers who focus on servicing smaller businesses with less than 200 employees, the risks may seem to outweigh the benefits at times.
The fact is that Americans are facing a retirement crisis. A survey by Towers Watson found 76% of U.S. employees believe they will be worse off in retirement than their parents. As an employee benefit adviser, you are tasked with helping clients understand the importance of 401(k)s. Especially for small businesses, offering retirement plans can not only help employees put their best financial foot forward, it can also instill loyalty among talented workers.
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However, there’s often a gap between small businesses understanding the need for 401(k)s and actually engaging in them. Small business resources are often stretched thin just covering day-to-day operations. And retirement plan complexity obscures whether they’re getting the right plan for their business. That’s why I developed a framework, called R.E.T.I.R.E, that I use with small business managers to help cut through the complexity and help them to asses 401(k) plans and providers.
R – Resources to help employees prepare for retirement
While most people know they need to save for retirement there tends to be a breakdown leading to inaction. This is why it’s critical that clients know they should look for plans that provide resources to help employees break through the financial jargon and understand how a plan works for them.
E – Engage employees
As I mentioned, there is often a gap between understanding and action when it comes to retirement. If employees aren’t engaged in the retirement process then it becomes an irrelevant offering. So you should make sure you or your clients are tracking participation in the plan and also working to fully engage their employees to enroll in the plan.
T - Tracking individuals toward retirement readiness
While it’s important to be supportive of employees who are contributing any amount toward retirement, the reality is that many aren’t saving nearly enough. Clients need to understand that they and their plan sponsors should be advocating for employees to save as much as they can, I encourage employees to save up to 10% of their salary, and often more depending on their situation.
I - Investment solutions for different types of investors
Providing a custom plan for each employee can seem daunting, but clients should look for plans that at the least offer a few tailored options. For the average employee, I typically recommend a target-date fund or managed account solution, but it’s important to consider that more financially savvy employees may have different needs or preferences.
R – Removing conflicts of interest
Conflicts of interest are all too common in the small plan space, and a critical issue to address early on. I realize that for some plan advisers this may be a sensitive issue, but not fully disclosing conflicts of interest not only hurts your clients but it can also affect your reputation long-term. Not to mention the new DOL rule makes this a requirement.
E – Expenses: Keep fees reasonable
Especially for small businesses, retirement plans should have fees that are reasonable for employees both in the short-term and the long-term. Clients should be assessing and have a full understanding of the fee structure of each plan and also the impact the fees will have on an employee’s long term retirement savings. The effects of fees over a 30-year period can seriously hinder someone’s retirement savings.
The intricacies of selecting retirement plan options are only exacerbated for small businesses; in many cases, the role of plan adviser is filled by the business owner or an HR manager, both of whom often struggle to find the time and resources necessary to fully understand retirement solutions. Additionally, the critical advantage benefits provide in creating a dedicated workforce is an important consideration for companies with fewer than 200 employees. As such, it’s vital to help clients streamline the decision-making process using tips like these.
