The Five Pillars of a Retirement Plan
Our country has experienced some of the most difficult conditions in decades –severe market downturn, economic and credit crisis, the Madoff scandal, an uncertain regulatory and legislative environment–which has threatened the future financial security of most employees. The American workforce is aging – from 2010 to 2020, 65 to 74 year olds will occupy the fastest-growing segment of the population, while 55 to 64 year olds will be the largest segment of the population. Many near-retirees are now postponing retirement or facing the prospect of a lowered standard of living during retirement. In light of the aging population and Congress’ recent focus on the integrity of retirement plan administration, design and investment monitoring, it’s more important than ever for your company to have a competitive, compliant retirement plan.
An employee retirement plan can help in multiple ways:
- Recruit and retain valuable employees
- Bridge the gap between Social Security and retirement income needs, which are estimated to be 85 percent of current income
- Reduce tax liability – contributions to employee accounts are tax deductible from business income
As a decision-maker, it’s important to understand how a successful retirement plan can help benefit you and your employees. There are five pillars upon which a successful retirement plan can be built:
1) The Plan Fiduciary – The named fiduciary is primarily responsible for the overall operations and administration of the plan. Understanding the role and responsibilities of a fiduciary necessary for establishing and maintaining a successful retirement plan can be a daunting task, therefore relying on the guidance and expertise of a plan consultant is common. They help fiduciaries limit and manage personal and corporate financial liability while enhancing investment opportunities and improving overall plan value.
2) Plan Design and Compliance – Each company has individual needs and a retirement plan needs to be responsive to them in selecting the appropriate plan type and design, as well as ensuring plan compliance. Key issues such as cash flow, organizational structure and size factor into the type of plan you select (401(k), Roth IRA, Profit-Sharing Plan, SEP IRA, SIMPLE, etc.). Within each plan type are different design options to help maintain the plan’s tax advantaged status. One size does not fit all, and your advisor can help determine the design to maximize contributions, minimize tax liabilities and remain compliant.
3) Selection and Monitoring of Plan Investments – Develop an investment policy statement, select a balanced investment lineup and designate a default investment option for your plan. A retirement plan must provide a balanced selection of investment options that have a track record of strong performance when compared to benchmarks. Consider those providers that offer a variety of investment options within different asset classes which allows diversity of investment mix. Ibbotson and Kaplan’s 2000 study supports the conclusion that asset allocation is by far the biggest determining factor (91.5%) of portfolio performance.
4) Plan Participation and Education – Implement strategies that can help your employees meet their retirement goals. As employees struggle to make their own retirement decisions with less support from Social Security and traditional pension plans, they depend on employers to sponsor retirement plans that can help them meet their financial goals. Help maximize your plan’s effectiveness by taking actions such as benchmarking your current results against industry averages, implementing automatic features such as deferral increases, designing an education strategy that helps ensure your employees understand the value of the plan, and giving them access to the plan consultant who can help them make informed investment decisions.
5) Service, Technology and Day-to-Day Administration – Select a provider whose plan administration capabilities and level of service fits best with your organizational needs. Your retirement plan should help minimize the burdens on your organization, not bog you down with day-to-day administrative issues. Considerations can include how much time you spend managing your plan, access to participant resources and tools, dedicated client contact, efficiency of payroll and loan processing, and reasonable fees relative to other providers.
Individuals are being asked to assume greater responsibility for the planning of their retirement needs. Now more than ever before, and it is important to use these five pillars to help you build and maintain a successful retirement plan for your company, and your employees.