Let’s Talk – Seriously – About Retirement

As an industry leader, we are fully engaged in the continued national dialogue around retirement readiness. A major part of that effort is speaking with retirees as well as those still in the active phases of their careers to determine what issues and concerns they have about strategizing for their futures.

To learn more about retiree perspectives, Pentegra regularly commissions a Harris poll to determine the state of the retirement nation. This year we also independently interviewed dozens of retirees for additional insights as part of our Beyond the SmartPath™ initiative.

The results of the survey and follow-up interviews held no spectacular surprises. Among those we interviewed, every respondent echoed the long-standing plea of the retirement industry and our Harris poll results: Save early and often. Most suggested doing this by getting involved as soon as possible in any retirement savings vehicle offered by one’s employer – especially a 401(k), if available – and to contribute enough to take full advantage of employer matching contributions.

Our respondents also universally advocated the truism that it’s never too early – or too late – to start saving for one’s retirement. “The key thing is that the cost of living keeps going up, which makes it difficult to set money aside,” noted one. “But a little something is still better than nothing.”

A recurring theme was that conversations about planning for retirement are not taking place with enough frequency today. Most of the folks we spoke with said they grew up in households where serious advice about the topic was entirely absent.

The establishment of the 401(k) in 1978 changed all that. Workers became more directly involved in the topic, and as a result they tended to offer practical advice to their own children … if not from a young age, then certainly as their kids began weighing, and embarking upon, their own career options.

However, how seriously those children – and successive generations – have taken those talks remains very much in doubt. A constant misnomer that “comes with the territory” of being young is that thinking about retirement is viewed as something that does not need to occur for years to come … a fallacy that is unfortunately all too common.

Although retirement services providers like Pentegra can explain the ins and outs of various retirement savings strategies, the fact that so much misunderstanding, misinformation – or, for lack of a better word, apathy – about retirement planning remains, is a sobering fact. Thus, we are introducing and promoting the hashtag #talkaboutretirement, designed to help spur dialogue among family members, business associates and friends, in addition to industry professionals.

We hope that #talkaboutretirement will indeed become a trending topic – one that continues to trend for some time. Having an open dialogue about how you view your retirement savings (if at all) can only help, both in the short term and the long run.

Pentegra Retirement Services is the NAFCU Services Preferred Partner for Qualified Retirement Plans for Credit Union Employees. More educational resources can be found at www.nafcu.org/pentegra

How Innovative Plan Design Can Contribute to a Credit Union’s Success

Taking a holistic approach to designing any member’s retirement plan is a goal well worth trying to attain. This is especially true when it comes to credit unions, where many of the same factors facing banks today – ever-proliferating technology, competition, and consumer demands – are being felt just as strongly.

Developing an effective and flexible retirement program involves creating a plan that not only assists employees in meeting their retirement goals but that also addresses a credit union’s business needs. Designing the right retirement program requires a keen understanding of an organization’s management philosophy; compensation strategy; competitive considerations and analysis; demographic considerations; the maturity of the institution; and – of critical importance in today’s shifting landscape – the different types of retirement plans available.

We have identified two basic approaches to developing a business’s employee benefits program. First is the objective approach, wherein one takes into consideration what kind of balancing of benefits is needed for employees; after all, a 50-year-old employee’s needs are vastly different than a 25-year-old’s.

With the second – the competitive approach – benefits and compensation packages are offered in order to attract and retain employees; benefit adequacy involves an analysis of wages and the level of benefits offered by one’s peers. Again, the state of play in the credit union space in Washington, D.C. will be vastly different than that in Boise, Idaho, or Peoria, Illinois. An ideal plan will include both the objective and the competitive approaches.

What we call the “cross-tested plan” seems to be one of the most effective tools in plan design today. Such plans are being used more frequently as a way to reward longer tenured employees; reward and incent by job category; restore benefits lost due to a defined benefit (DB)/pension plan freeze or cutback; and/or provide additional benefits in lieu of a supplemental executive retirement plan (SERP) or non-qualified plan.

While DB pension plans tend to favor older employees, a cross-tested plan is a type of 401(k) or profit sharing plan that can be designed to allow a credit union to allocate contributions to specific groups of employees, who can be sorted by a number of categories including age, tenure, job category, management vs. non-management.

Furthermore, cross-tested plans focus on benefits at retirement rather than on regular contributions, enabling employers to provide higher contribution amounts (expressed as either a percentage of compensation or a dollar amount) to older employees, employees with more years of service, and/or employees who are performing the most important functions for the business. Because younger employees have a longer time horizon in which to grow their assets, cross-tested plans effectively permit employers to contribute more for their older employees.

In a cross-tested plan, each subset of employees receives a different level of contributions, and must be defined in the plan document. The actual contribution percentages can be decided at the end of each plan year and can change from year to year. What’s more, a company that already has a traditional 401(k) can overlay a cross-tested plan or establish a separate profit-sharing plan.

Keep in mind that every cross-tested plan has its own individually designed formula, allowing a given organization the ability to control its own destiny in terms of total contributions made on a year-by-year basis.

With an age-weighted plan, employer contributions are allocated among eligible employees based on both age and salary. Again, since a participant’s time horizon to retirement is factored into the allocation, older, more highly compensated employees tend to receive a larger share of the overall contributions:

Rich Rausser

There are, of course, other factors to think about when considering a cross-tested plan. But these are the broad strokes; I encourage you to investigate further on your own, or contact a reputable retirement planning provider to learn more.

Pentegra Retirement Services is the NAFCU Services Preferred Partner for Qualified Retirement Plans for Credit Union Employees. More educational resources can be found at www.nafcu.org/pentegra

Ins and Outs of Fiduciary Outsourcing for Credit Unions

By: Richard W. Rausser, Senior Vice President of Client Services, Pentegra Retirement Services

With retirement plans seemingly becoming ever more complicated, outsourcing of fiduciary investment responsibilities has steadily become more commonplace. This is especially true in the case of the C-Suite at credit unions, which can find outsourcing very appealing.

Not only is the passing along of fiduciary responsibilities one less burden for credit union managers, allowing them to focus on day-to-day business and obviating the need for them to become qualified plan experts, but the practice can also serve to insulate them and their credit union from a number of risks.

Benefits of Outsourcing

Outsourcing to a sanctioned third-party fiduciary guarantees that a given plan’s documentation is up to date, complies with all laws and regulations, and delivers appropriate disclosures to plan participants and sponsors.

If a plan is large enough (meaning it has roughly 100 to 120 participants) it requires an independent auditor – the selection of which again can be provided by the external fiduciary, saving the credit union time and money. (It should be noted that investment fiduciary outsourcing can be appropriate for defined benefit and defined contribution plans of all sizes.)

In addition, the day-to-day management of a plan involves, among other things, making sure the plan is running as it should be; nuts and bolts record-keeping; and administrative decisions about such issues as a plan participant’s request for a loan or a hardship distribution.

Customizing Responsibilities

Arranging the responsibilities of a third-party fiduciary should be fairly easy to customize; one can outsource all of the above or cherry-pick whichever duties one wishes on an ala carte basis.

A credit union needs to provide a reputable third-party fiduciary with the following:

  • Data on the plan participants;
  • The money involved with the plan; and
  • A commitment to regularly review the plan’s performance (usually once a year).

In that way, any questions or concerns can be addressed efficiently. (Of course, any issues that rise before the review date can also be discussed at any time.)

Fiduciary Responsibility

If there are record-keeping errors made by the outside fiduciary, it is that fiduciary’s responsibility to make amends, including making up any monetary shortfall. In the unlikely case of a participant-filed lawsuit, the outside fiduciary is again front and center, providing the defense in the case and making good on any claims or settlements.

The credit union’s board and senior management are insulated from responsibility; even though the plan ultimately belongs to the credit union, it is the named fiduciary who holds the liability in such instances.

Such an arrangement can also be of value in the case of multiple employer plans (MEPs), an employee benefit plan that can be maintained as a single plan in which two or more unrelated employers participate. As each credit union has its own separate boards of directors, the advantages of having an independent fiduciary to manage and administrate the plan are readily apparent.

Credit Union Responsibilities

All of that said, there will remain some fiduciary responsibilities and liabilities for the fiduciary responsible for selecting and contracting with the outsourced fiduciary. Breach of contract is the most obvious of these, but there is also the matter of monitoring/reviewing with the outside fiduciary that I mentioned previously.

In addition – and this should go without saying – it is incumbent upon the relevant credit union executive to read all communiques from the third-party fiduciary, and to ask and follow through on any questions or concerns.

None of these duties should be particularly onerous, especially if you have chosen a reputable external fiduciary. When considering such a company – as you should with all outside vendors – “test drive the car”: Find out all you can about several different ones, ask lots of questions, and make as informed a final decision as possible.

Learn more from Rich by watching the recorded webinar: “Innovative Retirement Plan Design for Maximum Results.”

About Rich Rausser:
Richard W. Rausser has over 25 years of experience in the retirement benefits field. He is Senior Vice President of Client Services at Pentegra Retirement Services, a leading provider of retirement planning services to financial institutions and organizations nationwide, founded by the Federal Home Loan Bank System in 1943. Rich oversees Pentegra’s consulting, marketing and communications and actuarial service groups at Pentegra. He is a frequent speaker on retirement benefit topics; a Certified Pension Consultant (CPC); a Qualified Pension Administrator (QPA); a Qualified 401(k) Administrator (QKA); and a member of the American Society of Pension Professionals and Actuaries (ASPPA).

Pentegra_Logo_FinalPentegra is the NAFCU Preferred Partner for Qualified Retirement Plans for Credit Union Employees

Decumulation: There Is No Rule of Thumb

By Rich Rausser, CPC, QPA, QKA,   Senior Vice President, Pentegra Retirement Services

In most pursuits, people usually look for a “rule of thumb” when it comes to sound strategies or best practices. However, when it comes to developing a retirement plan strategy the rule of thumb is that there is no rule of thumb.

The reason for this may be obvious. As individuals, we all have our own needs, wants and concerns; many of us may be the same age, live in the same geographical area, and even make the same exact salary. Even if two people were hired on the same day by the same firm at the same salary, and made equal contributions to their 401(k) plans throughout their careers, there are still a number of variables to prevent them from taking a “one size fits all” approach to decumulation.

Are both persons married? Are their spouses/partners both working and, if so, what are their salaries and retirement savings? Do they have any children? Where are they in terms of college expenses and healthcare needs?

Unrealistic Rules

I note this because there has been some discussion of late over an industry-wide “rule of thumb” that suggests retirees should try to replace 80 percent of their income during the first year of retirement. While that may be an admirable goal, it may not be realistic for many retirees for the reasons listed above as well as others.

Another specious rule of thumb is that retirees will simply take their 401(k) savings as a lump sum distribution when they retire. While lump sum distributions are certainly a viable option, many plan participants may not even be aware that other options exist and may benefit from further education about alternative distribution options.

Alternative Distribution Options

Many 401(k) plans have numerous distribution options, thus offering a tremendous amount of flexibility in how retirees can take their money. These can include what we call an “ad hoc distribution” – whereby the retiree takes out some money whenever he or she wants; a regular, periodic distribution — $2,000 per month, for instance, or $6,000 per quarter; or structuring payouts over the retiree’s life expectancy.

There is another option that I have mentioned before: supplementing one’s retirement income by purchasing an out-of-plan annuity that can provide a guaranteed level of income to retirees for as long as they live. If a retiree puts 20 to 25 percent of their retirement savings into an annuity, with Social Security providing supplemental income and the rest of the retiree’s account balance consisting of various other pieces, the retiree is in effect “pensionizing” part of their retirement savings.

The annuity option should be available to every 401(k) plan participant, regardless of individual circumstances; it should be viewed as another tool in their retirement savings tool box.

Retirement plans should be constructed in a way that provides the best possible solutions to its plan participants in a cost-effective manner.

For additional information, watch the recent webinar, “Keys to Building Successful Retirement Outcomes.”  Or, download The Pentegra Distribution Path™  for an overview of all the options available to employees and essential tips for creating a decumulation strategy to build a lifetime income stream.

Pentegra_LogoPentegra is the NAFCU Services Preferred partner for Qualified Retirement Plans for Credit Union Employees. More educational resources and contact information are available at www.nafcu.org/pentegra