By Stephen Palm
Retirement planning is the process to prepare for the phase of life after employment income ends. There are several lifestyle items to consider. However, the primary issue is will there be sufficient assets and income to provide the desired income and lifestyle for the remainder of the retiree’s life.
Research shows the earlier a person begins preparing for retirement and the more they contribute for this stage of life, the greater likelihood of a successful outcome. This column will address the important partnership between employer and employee to help employees improve their retirement readiness and outcome.
Many recent surveys show that employees are not prepared, or “on-track” for retirement. In one survey of employers:
When it comes to generating wealth and preparing for retirement, some pursue entrepreneurship and others will invest in real estate. Each has pros and cons, and will better suit certain people. However, most people today rely on portfolio investments, such as retirement accounts and savings, to supplement Social Security during their retirement years. This was not the case a few decades ago.
In the past, retirement for many employees came in the form of a traditional company pension plan. It’s a great mechanism for those who stay with their career and employer for 25 to 30 years or longer. Some people can amass a large pension retirement income stream for the remainder of their life as they accumulate years of service and grow their income.
With a company pension plan, the employer contributes to a pooled investment account for the eligible employees. An actuary determines the total amount needed in the pension fund for the employee’s future benefit. Each year the actuary will determine if it’s “fully-funded,” “over-funded” or “under-funded.”
The employer hires a professional investment manager to oversee the account. The investment manager will understand the risk-return tradeoff and intricate details to avoid investment pitfalls. If the pension account becomes under-funded due to investment underperformance or insufficient contributions, it is the responsibility of the employer to contribute more to the fund to support the employee’s future retirement payments. The employer can contribute additional dollars all at once, or over a multi-year period.
Having only been around since the 1980s, company-sponsored 401(k) plans and IRAs have grown to overtake pension plans. With this shift, responsibility and control also has shifted.
Employees must be responsible to review investment options, understand the risk and return opportunities of each investment option, and select the appropriate investments for their time horizon; have a consistent savings plan throughout their life sufficient to accomplish their retirement goals; regularly review their “on-track” status; and make sure they will not outlive their investment account
Unfortunately, recent surveys show a bleak outlook:
Even though the shift from pensions to 401(k) plans has taken place, employers should not take a hands-off approach to their employees’ financial well-being. Just as owners encourage their workers in other healthy living categories, employers should encourage financial wellness.
Here are suggestions for employers:
If an employee seeks the advice of a financial advisor (similar to an actuary for a pension) and determines their retirement is “under-funded,” they are able to reverse course and move toward being fully funded. The options for the employee are to decrease current spending and increase retirement contributions; delay the retirement date; or decrease the retirement income expectation.
Despite the perceived shift of responsibility in retirement planning from employer pension to employee 401(k) plans, employers still play a critical role in helping their employees achieve long term financial and retirement success. The partnership between the two is very important and can result in long-term success with strong participation from both sides.
Stephen Palm is a certified financial planner with HFG Trust in Kennewick.
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