Make no mistake, the DOL’s new fiduciary standard of care puts the spotlight on advisor services and the “reasonable” compensation you may receive for those services.
It will be advisable for 401(k) advisors, at the beginning of each plan year, to meet with their plan sponsors to create an “annual impact policy statement.” Its purpose is to establish the specific metrics of success sponsors want to achieve in order to impact their employee’s retirement readiness.
There are five pillars to retirement readiness that can be effectively tracked, and should therefore be included. They are:
- Portfolio Allocation
- Savings Rates
- Years to Retirement
- The Income Replacement Ratios
- The Longevity Factor
All of these pillars combine to create a “longevity paycheck for life,” which can contribute to participant’s retirement goals and their chances of achieving a “minimum adequate rate of success for replacing their income throughout their retirement years.”
Portfolio Allocation: Here we measure how employees are investing. We’re looking at whether they’re properly diversified for their age. We’re concerned by employees investing in only one or two funds or are over-weighted in their asset allocation selections. We’re going to measure portfolio allocation by specific age groups as well; 20 to 30, 30 to 40, 40 to 50, 50 to 60 and 60 to 70 through to retirement.
Saving Rates: We measure everybody’s saving rates by age group. We may find that younger employees are saving less than older or vice versa. We may want to roll up our sleeves and do customized meetings for a particular age group to discuss the power of compound interest, Roth vs. pre-tax, increasing their contributions by 1 percent per year and why saving more at a younger age will increase their longevity paychecks for life. With more data regarding savings patterns of different age groups, we can customize our communication efforts when targeting these groups. Most record-keepers today have the ability to do this and create both direct mail and email campaigns to support live, in-person education meetings.
Years to Retirement: Here we focus on measuring how close people are to their chosen retirement date. With people working longer, it will be critical to survey participants, especially those 50 and older, to determine how long they’re considering working. We can then design customized education meetings to encourage those individuals who may need to “catch-up” on their savings percentage. The Income Replacement Ratio: This focuses on calculating each participants “income replacement ratio.” This is the percentage of a participant’s current income adjusted for inflation, which they will need to achieve at the designated retirement age to generate longevity paychecks for life. We can then create an annual education series to teach employees about specific income replacement ratios and how increasing their contributions by just 1 or 2 percent a year could easily get them back on track to save enough money.
The Longevity Factor: As American workers live longer and work longer, consideration will need to be given by both 401(k) advisors and plan sponsors to adding a longevity annuity option for participants in creating guaranteed-income payments (longevity paychecks for life). Many quality record-keepers make available a variety of ways for a participant to guarantee their contributions will create a guaranteed income benefit for life. These long frowned-upon features need to be considered by all advisors and plan sponsors for their longer-living employees. Careful due diligence and documentation will be required.
Today, good record-keepers can provide the professional 401(k) advisor and plan sponsors with the data and metrics needed to create an annual impact policy statement, one that measures each of the five pillars of longevity paychecks for life. Armed with this report, advisors can work with employers to track each participants success, design customized communication, education and automatic programs that participants can look forward to, when—and if—they choose to retire.
Charles D. Epstein, The 401k Coach, is the author of two books, “Paychecks For Life: How to Turn Your 401k Into a Paycheck Manufacturing Company,” and “The Secrets of a Successful 401(k) Plan,” (available on Amazon). He can be reached at cdepstein@the401kcoach.com.
(From 401(k) Specialist, Issue 3, 2016)
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
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