BenefitsEngaged Workforce

Benefits Package: Be Advised

The sensitivities, issues, and potential rewards companies face when providing counsel to employees about their investment and retirement strategies.
 

By Daniel A. White
 
 
As companies have increasingly abandoned defined benefit plans in lieu of 401(k)s and similar instruments, the investment landscape has shifted. The U.S. Department of Labor estimates that approximately 483,000 participant-directed individual account plans now exist, covering an estimated 72 million participants and holding almost $3 trillion in assets. That is a very large—and expanding—group of people with a growing responsibility for making their own investment decisions.
 
For companies and human resources professionals alike, the implications are significant. As a way to ensure that participants have all the information they need to make informed decisions, the Employee Retirement Income Security Act (ERISA) mandates the disclosure of information related to fees and expenses associated with such plans.
 
Unfortunately, while they generally do a good job of disclosing that information, all too often human resources professionals do not really have the necessary expertise to go very much beyond that: to provide account-holders with the details and perspectives necessary to make intelligent and strategic planning decisions. Increasingly, companies are discovering the value of bringing in experienced wealth management professionals, particularly those specializing in retirement planning.
 
Many of the standard one-size-fits-all investment models are not built for those approaching and entering retirement. Even the standard formulas for a gradual reduction in risk over time tend to leave pre- and post-retirees too vulnerable. Additionally, all too often, employees go into target-date funds thinking that they do not carry any risk. But they do. A common mistake is that account holders use simplistic formulas when deciding how to structure their investments—simply picking the funds with the highest five-year returns, for example—without considering where they are in life, how to balance portfolios, or how to strategically allocate funds.
 
Perhaps the biggest benefit from bringing in an outside expert is simply to help employees become aware of their options. Experienced advisors can do much more than provide investment advice—they can educate, inform, and make employees aware of options they might not have even known they had. With more companies offering cash-balance plans with funds paid out in one lump sum instead of as an annuity, investment decisions can have an immediate resonance, and understanding the full range of possibilities is more important than ever.
 

Everybody prefers great weather, but we also plan for a rainy day. It makes sense to be prudent and protect employees from bad, incomplete, or simplistic advice at the precise time when they need informed guidance the most. A much-talked-about study from T. Rowe Price made certain generic assumptions about portfolio value and monthly withdrawals and determined that, as of the year 2000, the average retiree stood an 89-percent chance of successfully making that money last for 30 years of retirement. Unfortunately, T. Rowe discovered that that figure had dipped to just 29 percent as of last year—and dropped as low as 6 percent at the nadir of the recession.
 
Providing a boost to employee morale and reinforcing that the company genuinely cares about the welfare of its employees can pay very real dividends. From an HR perspective, bringing in competent outside counsel to help employees review their retirement planning options is—appropriately enough—a great investment. Seek out professionals who specialize in retirement planning and who will be able to give employees personal attention and direction.
 
Providing employees with updated advice is not just important—it’s critical. One big upcoming regulatory change in particular will be especially significant from an HR perspective. Changes and refinements to ERISA that go into effect later this year will require even more extensive disclosure with respect to participant-directed investment plans. HR representatives will be responsible for gathering and communicating a much more comprehensive array of information, most notably an exhaustive accounting of the costs associated with record keeping, investment management fees, and other expenses. We’re likely to see even more costs passed along to employees, and an active effort to secure outside guidance can really help employees realize the value of those monies.
 
HR professionals have a responsibility to provide employees with high-quality information. Bringing in an experienced financial advisor is an ideal way to do that, as well as conform with new disclosure regulations and legal standards mandating that. With regard to participant-directed plans, HR professionals must act solely in the interests of plan participants. It’s never too early.
 

Daniel A. White heads up Glen Mills, Pa.—based Daniel A. White & Associates, a financial planning firm. For more information, please visit www.danwhiteassociates.com

Tags: Benefits, Engaged Workforce

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