A couple of phrases are making the rounds in retirement plan circles; perhaps you’ve heard them. They are "retirement readiness" and "independent fiduciary." While they have different meanings, they are more connected than you may suspect.
We spoke with Jason Chepenik of Chepenik Financial (www.chepenikfinancial.com), who advises clients about their benefit programs and specializes in retirement plans. Chepenik is convinced that one of these terms is being thrown around a little too liberally these days.
“You will never hear the words, ‘Thank Goodness, because of my investment fiduciary, I can retire!’” Chepenik asserts. “We have a retirement crisis in America, and I’m certain it won’t be solved because of the plan’s investments.
“Yes, where the money is invested does matter. But the problems will only be solved if people save more, understand more, and can participate in better-designed plans.”
The retirement crisis Chepenik mentions is, in fact, worldwide. For today, we will focus on the trouble here at home. A Forbes® magazine contributor recently stated that the average 65-year-old American has a plan balance of just $25,000. Even if you prefer the financial industry’s estimate placing the number at $100,000, the future looks bleak for these folks and those coming along behind them; some experts estimate that retirees will need at least $250,000 to cover medical costs alone.
ERISA 3(38) or 3(21)
An independent fiduciary is someone hired to take on much of the liability that comes with choosing investments for a retirement plan. For example, some plan advisors can be hired as investment managers under Section 3(38) of the Employee Retirement Income Security Act of 1974 (ERISA).
Under ERISA Section 3(38), the independent fiduciary assumes responsibility for making the plan’s investment decisions. If the fiduciary is diligent, competent, and performs the duties well, the responsibility for those decisions falls on his or her shoulders, rather than on those of the plan sponsor.
The plan sponsor (who is often the employer) still has responsibility under ERISA to oversee any professionals hired to do the job, including the Section 3(38) fiduciary manager.
Another option is hiring an ERISA Section 3(21) fiduciary advisor. This person will make recommendations to the plan sponsor, but the plan sponsor makes the decisions about which investment options will be available to the participants.
It is certainly worthwhile to consider both of these options to assist in running your plan, Chepenik believes. “But, I see too many advisors and vendors leading with the 3(38) idea for every plan. When you get down to it, fund selection is really not the problem.
“I hear about too many instances where someone states that hiring a 3(38) advisor will absolve the plan sponsor from all risks. That’s impossible. The plan sponsor can minimize risk, but not eliminate it.”
Keep the goal of retirement readiness in mind
Which brings us to the phrase, "retirement readiness." The ultimate goal of sponsoring a plan is to help employees achieve retirement readiness, meaning they will have enough money to last the rest of their lives. Since the decline of the defined benefit pension plan and the rise of the 401(k), the likelihood of retirement readiness has steadily declined for the majority of Americans.
The trouble is that people must now plan for their retirement, and the earlier in their careers, the better. “Saving the money is 99% of the work,” Chepenik says. “It is nearly impossible to invest your way to the finish line.”
That’s the reason he gets a little exuberant when discussing today’s topics. He wants to make sure average plan participants, and their employers, understand that saving is the most critical part of retiring well. Most importantly, they need to act on that understanding.
Sadly, it is all too easy for most of us to avoid joining the plan and managing our investments. With the frenetic pace of life, it often seems overwhelming to take on this additional responsibility. We are subject to unconscious behaviors that impede our progress. We avoid, freeze up, or act based on the latest stock reports. None of these is an effective way to save for retirement.
Good plan design is critical
That’s where good plan design comes in, Chepenik says. For example, implementing automatic enrollment and automatic deferral increases takes the pressure off the participant and gets them on the right path. Education about investing in the plan is still important.
“I commend every advisor who is dedicated to participant education,” he says. “When the message is delivered regularly and well, it can be helpful. Alone, education is not enough, though, so I firmly believe in good plan design.
“Along with automatic enrollment and automatic deferral increases, the way the employer match is structured has a big impact on how much people save,” continues Chepenik. “Most plans offer a match, with many of them contributing 50 cents for every dollar the employees save, up to the first 6% of pay.
“The first challenge is that many people still don’t join the plan. The second is that, if they do, they still may not contribute 6%. And the third challenge is that, even if they do contribute 6% and get the additional 3% matching contribution, they are still unlikely to accumulate enough to retire comfortably at that level of saving.
“That’s why I’m such a big proponent of automatic enrollment and automatic deferral increases. Even when the plan brings people in at a higher deferral percentage, even 8% of 10% of pay, they don’t tend to opt out of participating. Autoenrollment and autoescalation are the most impactful tools we have used to entice participants to adopt better saving habits. That can make a big difference for them later on.”
Stretch the match
“For plans that offer a match, there are better ways to structure it with the very same budget,” he continues. “For example, if you have budgeted for a match of 50% on the first 6% of pay, stretch the match out to a higher percentage. Try matching 30% of the first 10% of pay. For the person who contributes 10%, the dollar amount is the same, but now he is contributing 10% instead of 6%—a huge difference in the long run.
“My point is that, while it is important to understand what an independent fiduciary can bring to the table, it is also important to understand that they cannot solve the problem of low savings rates. Plans need to get good advice, and participants need good education. You should be able to rely on your plan’s advisor to bring both of those. If not, it may be time to look around.”