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Retirement Plan Benefit Payments

By Himanshu Bajaj

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 U.S. 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 USD 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 USD 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 USD 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.

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