401k Plan Sponsors: These 4 Steps Will Change the Retirement Lives of Your Employees
We all dream of a cozy retirement nestled close to the ones we love in an idyllic peaceful setting. Many would call this “success.” Success begins with but a single step onto the path. Now, here’s the amazing truth. The path has already been laid out. You don’t have to hack your way through unchartered jungle to find retirement success. Others have blazed the trail before you. You need only learn their route and commit yourself to the voyage, just like you would for any other goal you wish to undertake.
Julia Chung, Practice Leader for Wealth Strategies Facet Advisors in British Columbia, Canada, says “Just like when we are creating a career path (School, Internship, Junior Staff, Senior Staff, Management and so forth), there is a path to retirement success. The lottery isn’t going to provide the vast majority of us with a windfall and the reality is that careful planning and management of those factors that you can actually control – regardless of how boring they really are – makes the difference between success and failure.”
The path to retirement success is surprisingly short. It only contains four steps. What are these four steps, why are they so important and how do we know they are the four steps that will change your life? We’ll satisfy your immediate curiosity by briefly describing them here.
Step #1: Understanding the Basics of Retirement Success. Before you can bake a cake, you need to embrace the fundamentals of kitchen physics: How to measure ingredients; How to know which pots, pans and mixing bowls to use; and, How to best employ the variety of kitchen appliances as your disposal. Failure to understand even the most basic things about cooking might lead to a cake that collapses, a foul tasting dessert or even a hand burned by touching a hot oven rack. The same is true about “baking” a triumphant retirement. To succeed, you need to grasp the basics of savings and investments. The involves a little bit of math, but, thank goodness, the simple stuff from elementary school, not that calculus stuff from high school. Understanding the basics of savings and investments will begin to teach you both the limits of reasonableness and the importance of commitment when it comes to your retirement. Both of these often represent the difference between success and failure.
Some, like Steve Garfink, Founder of Retire Now or Later in San Jose, California, rely on Social Security, and for older folks, this may be an appropriate strategy. Garfink tells FiduciaryNews.com “Each annual cohort of retirees leaves nearly $50 billion on the table in benefits they would otherwise have collected over their lifetimes with a better strategy.” He feels “The single most important element in determining retirement financial success is getting your Social Security claiming strategy right.” Furthermore, he warns, “People fail to plan a strategy because most don’t even understand that there is anything to plan.”
For many, though, especially among those younger than age 45, there is the waning confidence in Social Security. “Most would agree that Social Security will be worth less going forward,” says Howard Safer, Chief Executive Officer of Argent Money in Nashville, Tennessee. He says, “The antidote is saving and investing not just for a ‘rainy day,’ but for a hurricane.”
Step #2: Avoiding the Common Mistakes of Retirement Investors. It helps to know the right things to do, but many times it’s vastly more important to know what not to do. Fortunately for today’s investors, we have generations of other investors’ experience to show us what to avoid. Unfortunately for those older investors, we’ve only recently begun to understand how to explain these common errors. Most of them fall under the definition of behavioral economics, a relatively new science that for a long time had been shunned in the academic community. Today, the field is not only accepted (its founders were awarded a Nobel Prize), but it might even be considered ascendant. Why? Because people are not perfect (i.e., not rational) and the best way to improve is to admit to those imperfections. We’ve come a long way since “Modern Portfolio Theory” and “asset allocation,” two theoretical concepts that have done more to frighten individual investors than anything else. Behavioral economics speaks in the language of common sense, something the common investor appreciates a lot more than the arcane stochastic formulae of earlier investment theories.
Jeff S. Vollmer, Managing Partner at Hyde Park Wealth Management in Cincinnati/Columbus, Ohio, believes these common errors “should be avoided at all costs.” They can have a long-lasting impact. Vollmer says “mistakes can actually set retirees back in terms of the progress they make towards longer term objectives. Once made, small mistakes can set one’s portfolio back. Larger mistakes can actually adversely impact one’s quality of living.”
“Avoiding common mistakes is a macro concept in that it impacts everything,” says Michael T. Prus, President of Scale Investment Group, LLC in White Lake and Grand Blanc, Michigan. Prus adds, “Making significant errors here and having the right investments is still unlikely to provide the desired results. Only after the macro issues are under control should micro issues like specific fund selection be considered.”
Step #3: Emphasizing the Three Critical Components to Retirement Success. Since we’re on the subject of “specific fund selection,” recall the findings of a 2012 Wharton study. The paper identified the four components that lead to retirement success. Of the four, the investor controls three: When to start saving, how much to save and when to retire. The fourth – investment return – has traditional been the focus of retirement plans (at the expense of encouraging savings). Yet, oddly enough, the Wharton study calculated that the real-life difference between investing in the optimal asset allocation versus the average asset allocation could be made up simply by working four more months before retiring.
Prus says, “Investors all too often focus on return when they discuss saving for retirement. Returns are largely, if not entirely, out of our control as market participants. Even an investor who has great returns may have failed to save enough for retirement if they didn’t set aside enough to begin with.”
“Investors who spend too much time worrying about the incremental outperformance of individual positions are often chasing their tails,” says Vollmer. “Each of the first three components are more or less meant to help one leverage the time-value of money, as well as the time until retirement. They can be proactively controlled and managed, and so should be begun as soon as possible. The last factor is a product of the marketplace, which is completely out of the investor’s hands. Every investor will have multiple markets cycles during which his money is invested and working on his behalf. Maximize the first three factors and the fourth becomes much less important over time.”
Step #4: Creating, Implementing and Monitoring a Personal Plan. In the long run, this is the one step that truly matters, as it impacts the other three. We’ve seen plenty of studies – as well as common sense – suggest that investors using a professional adviser tend to increase their chances of reaching their goals versus those who don’t. The reason can be as simple as professionals having a greater awareness of typical investor errors (see Step #2); thus, better helping their clients avoid those errors. On the hand, an adviser or “coach” can frequently possess the advantage of objectivity and the broad view to understand that cookie-cutter solutions usually don’t work. Professionals add tremendous value by forcing their clients to consider their own personal situations and needs. No one is ever truly average. Each investor has unique needs, desires and, ultimately, goals. Some folks have the self-discipline to focus on their individual plan while others might require an objective third party for help. And by “objective third party,” we’re referring to a real person, not a machine.
“Online calculators are a great start, but they are only a start,” says Prus. “They largely fail to consider your standard of living during retirement. These factors, as well as unforeseen expenses, can take a large bite out of retirement savings if they are not carefully considered by the individual on a case-by-case basis, not through a generic calculator.”
Vollmer says, “We know that the qualitative side of one’s life, through which we make risk management, asset protection and estate planning decisions, cannot be calculated by a calculator. Only by personalizing these, and weighing these factors against one’s quantitative reality, can one begin to truly arrive at sound, long-term financial planning decisions.”
Chung provides a fitting conclusion when she says, “Regardless of how normal or boring a person thinks their lifestyle is, everyone is unique. Everyone is different and there is no single solution or calculator – or dollar figure – that will solve the problem for everyone. If it was easy, it wouldn’t be a profession. Retirement and financial planning can only ever be a customized individual process, because every single life path is different.”
This is but a quick overview of the four fundamental steps everyone can take to live a successful retirement. Of course, there are a lot of details in each of these steps. We’ll visit those details over time in future articles.
Interested in learning more about this and other important topics confronting 401k fiduciaries? Explore Mr. Carosa’s new book 401(k) Fiduciary Solutions and discover how to solve those hidden traps that often pop up in 401k plans. The book also contains a series of chapters on this subject, including how to create an investment policy statement that defines a set of menu options consistent with the “one portfolio” concept (as well as leaving room for those few remaining do-it-yourselfers).