They Want Their 401s – k – salary reduction savings plan
Pensions aren’t dead but their pulse is weak. Employees want to see the rewards of their 80-hour workweeks piling up in their retirement plans now. Here’s a look at the demand for the self-directed nest egg, and what you can do to manage the work it entails for you.
Eavesdrop for a while at a nurses’ station at Mercy Health Services in Baltimore and you’re likely to hear plenty of tips being swapped. A few years ago, those tips were on homey topics like knitting, child rearing, and recipes. These days, however, the Mercy nurses are more likely to be talking about 401(k)s, investment strategies, and the stock market.
“Even the more mature senior nurses have grown to be 401(k) hobbyists. They track it daily, monthly, and quarterly,” says Edward Opet, senior vice president of human resources for the hospital and its affiliated clinics and doctors’ practices.
A scant three years ago, Mercy switched from a traditional pension plan to a 401(k). That’s when the nurses developed their sudden interest in the opinions of Alan Greenspan and the relative merits of mid-cap stocks versus blue chips.
And though Opet pushed for the change so that his employees could take advantage of one of the most popular 401(k) features-portability-he has been delighted to find that the new plan also has turned into a powerful recruiting tool for Mercy. “We were the first to do it in the health-care arena [in this market] and it was an extra perk for employees,” he says. “We’re noticing that it’s on the checklist of employees right out of school: Do you have a 401(k), and what is your matching contribution?”
For most employees, 401(k)s are no longer brave and no longer a new world. They’re the standard retirement savings tool, and woe to the employer who clings to his faithful, if boring, pension plan as the only option. Employers and benefits consultants agree that 401(k)s have become the norm, and the appeal of the traditional pension is fading fast. In fact, the widespread enthusiasm for 401(k)s has turned out to be a catalyst for a whole new mind-set about workplace savings for retirement.
Pensions aren’t completely dead, but they are definitely the wallflowers at this dance. Longtime employees who are vested in their pension plans aren’t seeking ways to ditch them, but they’re not paying much attention to them, either. A vast proportion of stock is still held by American pension funds, points out W David Hand, a principal with the Houston-based consulting firm Hand Benefits & Trust, Inc. Nevertheless, most employees don’t think much about their pensions past a cursory glance at the annual statement of account. After all, anonymous fund managers are making all the decisions. Employees don’t have to do much except hope that they get vested, and that’s usually just a matter of hanging around long enough.
Conversely, many Americans seem to be thriving on the responsibility of self-directing their 401(k) assets. Over 53 million Americans participate in 40 1(k) plans, which account for $2.13 trillion in assets, says Hand.
“Who’s pushing for change? It’s both employees and employers, and they feed off each other,” explains Tom Schlossberg, CEO of Diversified Investment Advisors, a Purchase, New York, consulting firm specializing in the design and maintenance of retirement plans. “Ten years ago, every aspect of a retirement plan was very different from today, [including] expectations for the plan and retirement itself. You focused on your job and trusted your employer for the future retirement plan.
“We no longer count on employers, and they don’t want to be counted on. We want instant gratification, and total flexibility. In 401(k) plans, each person has an opportunity to influence the amount of money that goes in, and how it’s invested. Employees can dictate how well the program is invested from the bottom up.” If people still expected retirement to be a twilight of rocking chairs and grandchildren, they might be willing to settle for just a stodgy old pension and whatever shreds of Social Security are available when they finally throw in the towel at work. But expectations about what retirement is all about are changing dramatically (see sidebar). According to a survey on attitudes about retirement saving sponsored by Transamerica, people expect to accumulate enough money to have lots and lots of fun and security. A substantial minority really are expecting golden years: 41 percent of Generation X (people now in their 20s and 30s) and 28 percent of baby boomers want to have at least $1 million at the ir disposal when they retire. Obviously, Social Security isn’t going to get them there. (In fact, most people–70 percent–believe that they can’t rely on Social Security for a comfortable retirement, according to the survey.)
These sky-high expectations explain why employees aren’t willing to passively watch a pension fund get managed for them. They want to have only themselves to blame if their golden years are anything but. Though the Transamerica survey shows that 58 percent of employees are “very satisfied” with their current array of retirement plans, a whopping 88 percent indicated that they’d rustle up additional savings strategies if they believed that their employer-sponsored plan was lacking.
Even the most tradition-bound employers are taking notice, and changing accordingly. As recently as 1998, 68 of the Fortune 100 companies offered only traditional pensions, with 22 offering hybrid plans and the rest, defined-contribution plans, reports Eric Lofgren, director of benefits consulting for Watson Wyatt Worldwide, a Bethesda, Maryland-based human resources consulting firm. Now, half of them offer just the basic pension plan, and those that offered hybrids are rapidly switching to defined-contribution plans.
“The big surprise to me was that huge jump in defined-contribution plans,” says Lofgren. “The new companies that are entering the Fortune 1000, such as retailers and some new economy companies, aren’t feeling the need to add a defined-benefit plan as they get big.” His observation is echoed by other retirement benefits consultants, who say that small firms, start-ups, and high-tech companies all shun traditional pensions. He estimates that more than 80 percent of companies with fewer than 500 employees offer nontraditional pensions.
The fact that defined-benefit plans almost always reward longevity over job performance is rapidly undermining those plans’ appeal, explains Lofgren. People want to see the rewards of their 80-hour workweeks piling up in their retirement plans now, not take it on faith that they’ll look back in 40 years and be glad that they slaved so hard at the turn of the century. Employers who want to cater to the expectations, and gain the appreciation, of younger employees typically weight the benefits package to vest earlier and provide much more self-direction and portability. After all, younger people are more likely to be facing multiple career, changes, whereas older workers are generally more settled, says Lofgren. Of course, millions of workers entered the workforce when longevity was a characteristic of a successful term of employment. Those in manufacturing and service jobs often were schooled early on to think of their contributions more in terms of time put in than results achieved. They may be unwilling to give up their pensions, or even reluctant to give up their pension mind-set, even if the pension itself has been gradually superseded.
Melissa Squyres, a benefits manager for TECO-Westinghouse Motor Co., in Round Rock, Texas, says that older members of the plant’s workforce of 600 appreciate the fact that they can count on their unglamorous but faithful pension plan to provide a base for retirement. Employees at the non-union plant had the opportunity to open a 401(k) in 1988, with five different investing options. Now, most of the employees who were covered only by pensions have retired, and virtually all who are left have either both plans or, if they were hired from the mid-1990s on, just the 401(k). In only a few more years, the pension will be completely phased out.
But TECO employees, accustomed to letting experts manage their pensions, have transferred that expectation to their 401(k)s, says Squyres. A full 41 percent of employees invest mainly in bonds.
Only 3 percent of the plant employees actively manage their 401(k)s, with the rest content to review their accounts’ progress every once in a while, “Not enough people are confident about their investment abilities to jump into it on their own,” she says.
Ironically, the very mobility that is a prime feature of 401(k)s may boomerang on job-hopping employees if employers get fed up with turnover rates, Lofgren says. The concept of sticking with your employer so that you can be fully vested might be used by employers to get employees to stay longer. “The turnover numbers are bad enough that you could go back to the traditional plan,” says Lofgren, only half-jokingly.
Your Next Challenge: Pre-retirees and Their Special Needs
Lots of people aspire to retire.
Peggy Malaspina doesn’t think quite that far ahead. She concentrates on the 2 to 10 years of pre-retirement, when retirement is right around the corner and people are starting to sort out how they’ll spend the rest of their lives.
It’s such an overlooked segment that Malaspina has made a career out of speaking and writing about it. She’s CEO of Malaspina Communications, Inc., in Boston, and author of the financial planning book Don’t Die Broke.
Most people figure that they’re just hanging on for the first bite of that carrot-retirement-that has kept them going for so long. But if they don’t plan their transition properly, they can lose thousands of dollars to unnecessary taxes, fees, and other expenses.
“The biggest story of the last couple of years has been employee stock-ownership plans. There’s a chance to lose a bundle in taxes if employees try to take money out over time,” she says. “The IRS is clear: you have to take all your stock at once, or you can’t avoid the taxes.” People accustomed to a regular paycheck often want to withdraw the money gradually, so that they have a steady cash flow, she explains. Doing so costs them 20 percent of the asset, due in taxes.
Malaspina believes that as the big bulge of baby boomers starts tumbling into retirement, employers will be in the hot seat to help them make smart decisions about spending their retirement money, as well as related issues such as staying on as a contract worker with the old employer.
The transition between employment and retirement is “getting more complicated, as people are phasing out gradually, working part-time,” she says. “An entire industry is going to crop up to say, Okay, you’re ready to retire, hire us. We will put together a transition plan, a retirement plan, and a legal plan.”
Helping Your Employees Become Their Own Plan Managers
David Kulchar is used to seeing first the blank look, then the panicky look, when he starts talking to employee groups about the housekeeping that their newly unveiled 401(k) retirement plans require.
And that’s just from the human resources staff. The real confusion begins when rank-and file employees start wading into the details of their new plans. “If it’s self-directed, how come there’s more paperwork than I thought there would be?” is one common lament. “Pensions are more complicated to understand, but it’s a once-a-year review,” he says. “Money is not flying in and out all the time.” Management of 401(k)s is “relentless,” he says. “It never quits.”
Fortunately, Kulchar, senior vice president of Cleveland-based Oswald Financial Inc., a retirement plan consulting firm, dishes out lots of advice to the clueless and confused. Oswald has plenty of company. As plans proliferate, employers are finding themselves having to explain apples to one group, oranges to another, and fruit salad to those whose plans overlap.
Employers are well aware that they have to discharge their fiduciary responsibilities to employees by explaining the legal limits of the plans, but in just the last 18 months, they have started to dig into the task of truly educating employees about how they can be their own plan managers.
A Transamerica study revealed that while 53 percent of employers say that they are personally very engaged in monitoring their own retirement savings, 54 percent of employees don’t think they know as much as they should and wish they had access to better advice. And a survey recently sponsored by Mutual of Omaha indicates that most participants in 401(k) plans have no idea how to invest and manage their assets. In fact, half of participants could not name any of the companies that provide investment options for their companies’ plans.
There’s plenty of room for improvement. Here are some strategies, tools, and tips that are starting to emerge as winners:
* Employers should have and communicate an actual investment policy statement that explains how the offered investment plans are selected and monitored. It’s not enough just to choose a pretty-good-sounding investment adviser.
* The personalized benefit plan just can’t be beat for conveying the long-term impact of today’s decisions, says Todd Wold, a marketing communications manager for American Express Retirement Services in Minneapolis. He finds that employees who are choosing not to participate in 401(k) programs because they think it costs them too much are among the most easily converted by hard numbers and projections.
* Employees often want to make their investment decisions once and then go on automatic pilot, rarely paying attention to nuances such as how the balance of their portfolio is affected by the different rates of growth of the assets it contains. An annual personalized report that includes recommendations for keeping the assets on track helps employees understand the inner workings of their portfolios, and the consequences of their decisions, so they can adjust accordingly.
* Employees who are accustomed to the old pension mentality can grasp the idea of defined-contribution plans by starting with defined-benefit terms, says Kulchar. In individual consultations, Oswald reps first find out what income the employee would like to have during retirement, and then work the numbers backwards from that defined benefit to show today’s defined contribution in order to arrive at the desired goal. Once the saving decision is made, they can get more education on the specifics of plan decision-making, says Kulchar.
* The latest twist on the personal portfolio consultation is the virtual version. Intranets that enable employees to access their accounts to check on balances have been popular for a while, but the latest generation of retirement-account management tools goes a step further. Online calculators, worksheets, and formulas let employees play with a variety of different options to see which ones they prefer. And because they can do it from home or during spare moments at work, they’re much more likely to be engaged in experimenting with what-if scenarios than if they had to work out each scenario with a calculator and legal pad. Retirement consultants are offering packaged software tools for exactly this purpose, such as Transamerica’s “Point, Click & Save” software, which lets employees plug in income and savings rates.
* Partnering with local financial planners or a call center staffed with knowledgeable retirement plan customer-service reps are both quick ways to connect employees with the level of detailed advice they may need, says Kent Klaus, partner with Arthur Andersen’s human capital practice in Chicago. He recently worked with Motorola, Inc., of Schaumburg, Illinois, which has just installed a hybrid “portable pension” plan. Andersen conducted seminars at Motorola facilities around the country to introduce the plan and staffed a call center during the enrollment period (and an intranet site, to boot). “When you engage employees and force them to discuss the alternatives, it’s much more likely to sink in than when you just put things out there and hope they read them,” says Klaus. “We’ve had client employees call the center and say, ‘I’m not sure that I can retire with just this asset,” and we say, “Well, you have a 401(k), too,’ and they say, ‘Really?’ With a little extra attention, the value of these programs will rise, and companies will get more bang for their buck than they are getting today.”
How Much Should Workers Invest?
Planning to die broke is unwise for at least two reasons,” says J. Michael Scarborough. “First, it ignores all those whom you care about who will outlive you….Second, planning to die broke requires you to die at just the right time. This, of course, is fraught with problems…Your only reasonable alternative, then, is to plan as though you’re going to live forever.”
Scarborough, author of The Scarborough Plan: Maximizing the Power of Your 401(k), knows what he’s talking about. CEO of the Scarborough Group, a highly regarded 401(k) advice organization, Scarborough has taught classes on economics and personal finance at Johns Hopkins University and Salisbury State University, as well as travelling the country giving educational seminars to clients and employees of Fortune 500 companies.
With the following tables, excerpted from his book, The Scarborough Plan, Scarborough illustrates an extremely important–and often baffling–component of 401(k) plans: projecting how much to invest.
“Retirement is not an age,” says Scarborough. “Retirement is not an event. Retirement is a phase you go through after you quit working where you’ve been working fulltime for however many years. And with any luck, it’s a phase you’ll spend 20 or 30 years enjoying. Enjoying, that is, if you figure out how to pay for it before you get there.”
According to Scarborough, a major facet of retirement is figuring out exactly what people plan to do when they retire, and then planning accordingly in advance. Some of the questions that Scarborough asks people to consider when thinking about retirement include:
* Where will you live? Will you sell your current home and buy a new one?
* What will you drive? What luxury items–such as a boat, a yacht or a chalet in Switzerland–will you buy?
* Have you set money aside for medical expenses, such as chronic medications, home health care, nursing home care, or hospitalization?
* Will you be able to provide financial assistance to your parents, children or grandchildren?
* What happens if your spouse dies, or conversely, if you remarry?
* Will you want to travel? How often? Where? In what style?
* Will you want to contribute to charities? What debts will you have to take into account?
Scarborough asks a lot of questions–even more than what’s listed here–but, once your employees have answered the question of what they want to do, they can figure out how much they’ll need to pull it off. Once that’s done, you can use these charts as tools to help them figure out exactly how much they’ll need to sock away to make it work.
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COPYRIGHT 2001 Gale Group