Fiduciary Is Fun!
(a.k.a. I heart taxes)
(a.k.a. I heart taxes)
The pendulum of life is always swinging. With respect to employees and employers the pendulum swang in the direction of paternalism in the middle 20th Century. Employees and their employers had informal contracts that implied that if employees worked there long enough, their employers would take care of them. That pendulum swung in the other direction for a good part of the last 50 years with employees assuming more and more responsibility for their own wellbeing and employers taking a more hands off approach. Is the pendulum swinging back again?
Some new research from PIMCO, a large asset management firm on the west coast, is suggesting that the pendulum is indeed swinging back at least a little bit. In the last couple of years, more and more research has come out that employees trust their employers more than they used to. They are looking to their employers for help and guidance in a number of areas from better health and wellbeing advice to retirement and financial planning tools. This new research from PIMCO is now showing a further iteration in employees and employers working together.
It has long been known that most employees when they retire have almost no idea how to arrange their assets in such a way as to provide a lifetime of income. And why should they? After all, they have been spending a lifetime accumulating assets and saving, not figuring out how to make their assets last the rest of their lives. It appears that employers are starting to take notice and help out. The PIMCO Study shows that in the Small Plan Market (<$50mm in plan assets), the top client priorities in 2020 are Improving Participant Retirement Education, Evaluating Retirement Income for Participants, and Minimizing Fiduciary Liability, in that order.
So what does this mean, or could this mean, to you as a Plan Sponsor? The first question to ask, of course, is do you have any interest in helping your employees prepare for retirement beyond just helping them save through the retirement or 401k plan? If yes, then it is probably a good idea to begin exploring what this assistance would look like. It should begin with education and helping employees understand how to use their assets in retirement. It could then move to helping employees work with an advisor to put together a plan for transitioning into retirement and living the life they want and can afford.
But where does it truly begin? It begins with working with an advisor with experience in helping pre-retirees plan for retirement. Experience helping employees understand their asset mix and the tax implications of using those assets. Experience with Social Security and estate planning.
If you are concerned with your current advisor’s level of experience, please give me a call. I would love to work with you and your employees as they prepare for a retirement they have earned.
Pete Welsh a/k/a 401kGuy
PWC is one of the largest accounting firms in the country working with some of the largest corporations in the US and even around the world. Given their size and scope, they do a lot of research, and one annual report they have been publishing for several years is around Employee Financial Wellness. They have been producing this report for 8 years.
The report is interesting because it asks employees a number of questions regarding their overall financial wellness and preparedness. How confident are employees regarding their financial decisions? What kind of decisions are employees making? What do employees think about their future? And the ones I find most interesting are those around what their employers can do to help them with their overall financial wellness.
Financial Wellness and programs around them in the workplace have been very popular for a number of years now. It’s very seldom I come across a 401k prospect that doesn’t have some type of “program” in place to address financial wellness for their employees. So you would think that after several years of workplace initiatives employees would be feeling better about their finances, right? Less stressed than ever. Ya, well, it doesn’t seem to be working out that way.
In 2017, the PWC survey indicated that 46% of employees said that financial or money matter challenges were their #1 stressor. After years of trying to help employees, the most recent PWC survey indicates that 59% of them now consider financial or money matter challenges their #1 stressor. Almost 30% more employees are stressed about financial matters now than they were just 3 years ago! At this rate, we should have everyone completely freaked out about financial matters by 2025!
So what the heck is going on here? During this time frame, the economy was strong, inflation was virtually non-existent, and unemployment was at historic lows. We can’t blame any of those factors. What I think is going on is an over reliance on technology as the solution to this issue. I see it all the time as companies roll out new programs to help employees. They are well intentioned, and often well-constructed, but they lack much human involvement.
In my practice, when I am able to meet with employees face-to-face to review their situations and make plans, they are not more stressed after our visit(s) but less stressed. Sure we use technology as an enabler, but the real work happens face to face.
If you are an employer who has implemented a Financial Wellness program but are questioning its effectiveness, I would love to sit down and discuss how we can change that result and begin getting your employees less stressed!
Please give me a call.
Pete Welsh a/k/a 401kGuy
I do a lot of 1-on-1 meetings with employees of my corporate clients. The meetings tend to be clumped after employee education sessions as part of the 401k or 403b plan. I always make sure that any employee who wants to have a private conversation with me about their situation has my contact information and we can schedule either a phone or in person consultation.
Yesterday I had a meeting with a young lady (24 years old is young to me) who works for one of my retirement plan clients. She asked to meet to get an opinion that was not a friend’s or family member’s on whether or not what she was doing was the right thing. She was a very impressive woman, in her first job out of college, and had done her homework on the retirement plan, investments, and savings options outside the plan.
As we were getting into her situation, it occurred to me that many individuals would benefit from the work she has done. First, she noted that many of the free planning tools on the web are too simplistic to account for life as we live it. How perceptive! Even at 24 years old she realized that while some of these tools can provide some direction, they are not a map. On-line tools are generally just calculators and none of us are math problems to be solved.
Secondly, she realized the value of saving both before and after tax. She had calculated what she needed to save in the corporate plan to maximize the company match, and then all additional dollars she is putting into a Roth IRA. She has an auto-sweep on her checking account to automatically take $500 per month out of her checking and put into her Roth IRA. What genius! We discussed how having both before tax and after-tax buckets of money in her retirement years will be extremely beneficial. She noted that many of her peers don’t even know that they can contribute to both a company retirement plan and a Roth IRA. It’s true that there are income thresholds that phase out the ability to do this, but for 2020 that threshold is not met until her income hits $124,000, and she is well below that.
After we got a clear picture of her retirement savings strategy, we discussed the need for an emergency fund and only then did we discuss the merits of whether or not she should try to pay down her mortgage.
Suffice to say that she is a remarkable young lady who will clearly be in a great position once she reaches retirement age…in 41 years! But what struck me most about her was how poised, confident, and in control she was after our meeting. I couldn’t help but think what an asset she must be to her employer/my client.
As a financial advisor, some days are better than others, but yesterday was pretty good, and inspired me to continue helping other employees of my clients to get the financial confidence she has. I would love to speak with you about how we might work on this together.
Please give me a call!
Pete Welsh a/k/a 401kGuy
I started working with a new client last week. The initial conversations were around their desire to establish a retirement plan for their small but growing company. The company was started in 2014 by the 2 founders and is in construction. They have now matured to the point where expanding their benefits offering makes sense and they want to reward the employees who were with them in the beginning and attract new talent. All of this is pretty straight forward, and we will be starting up a new plan for them in the next few weeks.
The interesting part of the conversation occurred after we discussed the establishment of the retirement plan. I asked the two owners about the company and what planning they had done. In particular, I asked about their growth plans, as well as their exit plans, including if one should die unexpectedly. They did not have good answers, but their answers were not that unusual for successful entrepreneurs. They have been working hard at growing the business, making sure that it’s moving forward, but not stepping back to consider longer term opportunities and risks.
One item on which we spent considerable time involved what would happen to the business if one of them were to die unexpectedly? They did admit that they had brought this up to one another in the past, but never moved forward to take action or to visit with anyone about it. When I asked them to “give me a rough number” on what they thought the business was worth today, they both said “$1million” at the same time. This means that if one of the partners were to die that the other would need $500,000 to buy out that interest. That’s $500,000 in cash, today. How much more might be needed in 3, 5, or 10 more years? And neither has the $500,000 needed now.
Additionally, we talked about how the founders have been reinvesting most of their earnings into the business to help it grow. This is great in many respects, but by doing so they have not been doing any planning for themselves. The business is everything, but we all know it might not always be. So the conversation quickly moved to how we can begin to de-risk their personal situations by initiating some financial planning for themselves.
In total, it was a good conversation with numerous next steps. They were concerned where to begin on a couple of action items and I told them that I could work directly with their CPA and Attorney to get the ball moving on the buy/sell agreement. I’m putting together some quotes for consideration and gave them a list of items I need to begin working on their personal situations. By breaking everything down into steps and charting a path forward, both partners felt empowered about taking control.
In many respects, that is how I see my job – empowering you as the business owner to take the steps you know need to be done but are unsure where to start. Give me a call at your convenience and we can begin taking those next steps together.
Pete Welsh a/k/a 401kGuy
Today I met with a client of mine for a committee review of the plan. It went as these meetings normally go – a review of plan level activity, a discussion of the fund line-up, how were the recent employee meetings, etc. All very pleasant with a good discussion.
At one point in the review, the owner/patriarch of the company asked “I see we have some employees invested in bonds. Why? They shouldn’t be. Can you let me know who, so I can speak to them. Fixed income is not where they should be putting their money.” To be clear, he was saying this with the best of intentions. He is universally loved by his employees and truly has only their best interests in mind. However….
It is not uncommon for employees to stop by an HR office or CFO’s office, or even the founder’s office to ask “what should I do with my 401k money?” It is also not unusual for caring individuals who occupy those seats to want to help employees with their money. But is this the right thing to do?
The problem with giving such advice, of course, is that you open yourself up to downside risk. It is almost never the case that people sue when things go well. They sue when things go wrong. So when an officer of the firm “helps”, “assists”, “advices”, etc. an employee on where to invest his or her money, downside risk is created when things do not go right
In fact, I believe there already exists a fair amount of risk as our Baby Boomers move into retirement and realize that their nest eggs are not what they need them to be. How easy would it be for an employee to look back on some “advice” their employer gave them years ago about investing and argue that but for that advice they would be in a better place with their retirement account?
Well, after we all had some fun in our meeting today challenging the owner’s actual knowledge of investing, we agreed on a better approach. As an advisor who serves in a fiduciary capacity, I am actually licensed to give “investment advice for a fee.” Since we were able to quickly conclude I was the only one so licensed, we agreed that in the future employees would be directed to me to discuss their investments and how to invest.
Are you an employer who struggles with helping employees invest? Is your advisor licensed to provide “investment advice for a fee?” Not sure? Give me a call and we can have a discussion about how to do the right thing without exposing the company to risk.
Pete Welsh a/k/a 401kGuy