Advisors Can Shift Conversation To Worker Security

By Cyril Tuohy

InsuranceNewsNet

Financial advisors are paid to help clients meet long-term financial goals and improve the retirement prospects of millions of working families. If that’s the case, why then are so many Americans concerned about having enough for their golden years?

It may be that Americans haven't set enough aside to generate interest from advisors who can help them. Or it may be that employers have shifted retirement responsibilities onto workers without much thought to how lifetime W-2 earners would fare 50 years later, with all that can happen in between.

In hindsight, it’s clear to many retirement experts that the defined contribution movement has been a boon to the employer, but a bust for the employee. Looking back, perhaps it was no surprise that “employers got to that decision sooner than employees did,” said Ann Reynolds, a partner with the global benefits consulting firm Mercer LLC.

The 401(k), which was designed as a tax-sheltered supplement to defined benefit plans for high-earning executives, was never engineered to be the primary retirement pillar it has become for many workers.

In many ways, financial advisors have been unwitting contributors to helping employers move defined benefits liabilities off the corporate balance sheet. Sure, they were just doing as they were told by the client but advisors, of all financial professionals, must surely have known that defined contribution plans were never going to replace defined benefit pensions as a strategy to provide a secure retirement for tens of millions of workers.

“Financial advisors have responded to what they’ve been asked to do, but they haven’t educated (plan) sponsors about the ramifications of those decisions,” Reynolds said in an interview with InsuranceNewsNet.

Reynolds and her colleagues said the time has come for plan sponsors to move past an obsession with controlling expenses to managing and helping workers prepare for the after-work life. Corporate human resources, where retirement benefits have traditionally resided, need to gain the upper hand once more from the finance departments and their narrow objectives of cost control.

The stakes are high, certainly higher than the latest quarterly earnings report. Securing a decent retirement for workers is just as beneficial to the employer as it is to the employee, Reynolds said, and the time has come for employers to earn the trust of employees once again – if that is at all possible.

The social compact that died long ago with the erosion of defined benefits can be reclaimed, even in the new world of defined contribution plans, and financial advisors are uniquely positioned to push for reform. Advisors and financial professionals are perfectly positioned to play a key role in rebuilding the bridge between corporate human resources and finance, and between management and employees.

“Financial advisors are in the right place to do that,” Reynolds said. “Organizationally, there’s an opportunity to do that.”

Progressive employers are more receptive to improving the social compact with employees. Some of the nation’s leading companies are taking a broader view of retirement-related risks in the wake of the financial crisis that exposed the “unintended consequences of the wholesale shift to defined contribution,” she said.

Many employers, Reynolds wrote in a report titled “Corporate Retirement Plans: What’s the Point?” having years ago bought into the economic advantages of the defined contribution model, now face ancillary retirement costs that they did not foresee.

Employers are finding themselves paying big bucks to retire employees who otherwise cannot afford to leave because they don’t have enough in their defined contribution plans, many of which took a big hit during the 2008 financial crisis, Reynolds said.

Older workers who would have long ago retired under the safety net of a defined benefit pension are staying, either to beef up their retirement holdings or simply to take advantage of health coverage. As they linger on payrolls, employers find themselves at greater exposure to employee health and longevity risks.

In other cases, older workers with seniority are dramatically slowing the speed of promotions for younger workers, Reynolds said.

Astute advisors, she said, should be playing the role of facilitator in helping plan sponsors redirect the retirement discussion from account balances and benchmarks to making sure employees can retire with confidence so that workers aren’t hanging on for dear life in full-time or part-time jobs into their mid- to late 70s.

Government intervention in the form of the Lifetime Income Disclosure Act, which would list income in retirement many years from now based on calculations given their asset balances today, might help companies regain some trust among their workers.

Offering guaranteed income options within retirement plans instead of a supermarket of mutual funds might also get workers to think about securing income streams through their retirement years and the drawdown phase of their assets.

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].