In response to my previous post, a few readers suggested that indexation available via gains in capital markets will boost the value of retirement assets over the long term, assuming the markets will recover. Others are seeking an answer as to what can be done to address the situation. In the meantime, with the collapse of asset values, the scenario has become worse for pension funds and IRAs. A few group IRAs in the US are even suspending their matching contribution.
The situation is compounded by the decline in markets, failures of businesses to generate enough revenue, and lengthening life spans, changing the actuarial tables. However, employees and employers can get a head start if they take a few simple steps:
Increased awareness of workers: According to the laws on the books, U.S. employers are required to inform their employees about available retirement benefit options, and assist them by explaining the pros and cons of the options they choose. It would help everyone (sponsors, employers and employees) if the costs incurred to educate employees on available benefits are reduced. In addition, if overheads associated with enrolling employees to the benefit plans could be reduced, it will add to efficiency of the plans.
It is possible to reduce these costs by leveraging technology, deploying specialized vendors and select process reengineering. Employers are increasingly refurbishing intranet sites with benefits information, plan details and forms. Today the task of educating employees, predominantly over the web, is delegated to specialized external groups than burdening internal staff. In some instances, the entire responsibility of managing content on web portals, support via specialized web-chat and 24x7 contact centers for educating and enrolling the employees is managed by specialists outsider of the firms. The benefits department of the employer merely manages the exceptions and provides guidance on policy issues.
Increased monitoring and realignment of assets: Employees generally rely on trustees for the administration and management of group IRAs. However, if workers elect to follow a more zealous approach in evaluating the investment performance of individual retirement accounts, performance could gradually improve. Employees should evaluate the returns being generated by the assets in their retirement portfolio against corresponding asset classes and other broader market indices. If the returns adjusted for the cost of administration and management are not commensurate, the workers should realign their asset allocation.
I’m not calling for dropping investment strategies or the severance of investment management strategists / managers for every unit decline of asset values. Rather, I’m saying that if more employees scanned the performance at periodic intervals and determined if the objectives are being met or not and making more aggressive decisions in realigning assets. For example, a worker with a self directed 401(k) who is planning retirement within the next two years observed a decline in value in his account over the last 24 months. This worker could continue his contribution, expecting the markets to recover and recoup the historic losses Alternatively, another approach could be to evaluate the returns, calculating the minimal contribution to keep the employee’s plan going and evaluating if it makes sense to realign his investments into products such as qualified annuities. The latter approach will come from an advisor who has the expertise and scale to manage these queries and subsequently benefit as a distributor of annuities to serve the needs of that employee. This scenario will require that trustees engage an administrator who is able to respond to more salient Q&As from workers; this doesn’t have to come at exorbitant cost.
Activist based approach: Realistic returns available at retirement could be summarized by the term “inflation, tax and cost adjusted annual returns”. Employees should periodically benchmark the costs associated with their retirement accounts, assets such as administrative fees, brokerages, and out of pocket expenses against industry figures published in media. Any significant deviation should be investigated and clarifications sought; it is possible the employee is paying for features such as loan options at attractive rates with payment of fee, or administrative charges for change of beneficiaries, which will be required later or these features could be availed elsewhere at much more effective prices. The impact of fees can be judged by the fact that if an employee has 35 years to retirement and the current IRA account has a balance of $25,000. If returns on investments in the account over the next 35 years average 7 percent and fees and expenses reduce average returns by 0.5 percent, the account balance will grow to $227,000 at retirement, even if there are no further contributions to the account. If fees and expenses are 1.5 percent, however, the account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce the account balance at retirement by whopping 28 percent.
In addition, employees and retirees alike should adopt an approach of being more informed as to the assets held in their retirement accounts, for example asking more questions about proxies, voting and the validation of other corporate actions.
Journalist and author, Jonathan Clements once said – “Retirement is like a long vacation in Las Vegas. The goal is to enjoy it the fullest, but not so fully that you run out of money.” For this to be true, both the employer and the employee have to work hand in glove together and with a zeal for growing their assets.
By Himanshu Bajaj
http://wns.com?smo=ab-bl-(Bankin n FS)
