Strategy

Getting Ahead of the Retirement Crisis: A Q&A With Jamie Greenleaf


When employers think about setting up retirement programs, they often focus on the investments. But investments are only a piece of the retirement program puzzle.

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Plan sponsors are responsible for keeping their plans in compliance and are subject to strict standards of conduct imposed by the Employee Retirement Income Security Act (ERISA). Beyond the fiduciary responsibilities, plan sponsors must encourage employees to be proactive in their saving strategies – not an easy task.

FEI Daily spoke with Jamie Greenleaf, Principal and Lead Consultant with the financial consulting

firm Cafaro Greenleaf about what every employer should know about retirement savings, supplementing Medicare and state-sponsored retirement plans.

FEI Daily: What do you wish people knew about saving for retirement?

Jamie Greenleaf: The most important thing you can do for somebody is to start them off early in life. The more time you have on your side, the better off you are. If you can get employees saving at a very early age, two things happen. Number one, it gives them the opportunity to start saving early. We’ve found through studies that when you save prior to retirement, you learn budgeting and when you go into retirement you’re able to live on less than you originally anticipated because you had been saving, and were used to budgeting and living within your means.

Number two is that by starting early, you have to contribute a lot less than somebody that waits until they’re able to “afford it,” where they’ll have to put in a lot more money. That’s the beauty of the tax-deferred compounding interest.

FEI Daily: How can small plan sponsors educate their employees?

Greenleaf: Engagement is extremely important. But, the reality is that all of us are guilty of behavior that we all have as human beings and inertia is one of them. By using things like auto-enrollment and auto-escalation, you get people engaged in the plan because they actually have to take action to opt-out, as opposed to taking action to opt-in. Once they’ve been auto-enrolled, if they don’t make a decision to do anything after that, auto-escalation happens – it continues to increase on an annual basis so that you’re being forced to save a little bit more every year.

Auto-enrolling employees into target-date funds allow them to set it and forget it, and the asset-allocation model will change as they go through life. As they get closer to retirement, it becomes more conservative. I would say most small businesses should look at that option as a way to get their employees engaged initially. And then education continues the conversation.

Keep it simple. I always tell people: think about somebody throwing a tennis ball at you. You’re most likely going to catch it. Now, if they throw two tennis balls at the same time, you may catch one but you probably won’t catch both of them. Now imagine if they throw three or four tennis balls at you, the likelihood of you catching any of them is probably very low. When a new employee comes onboard, you’re giving them a lot of information about the benefit packages that you have. By keeping it simple and having them not have to think about it, they’re able to make better decisions because they don’t have to make a decision.

FEI Daily: How can plan sponsors manage fiduciary risk?

Greenleaf: They have to have a documented prudent process in place. Risk is something that you want to spread across as many vendors as possible. You want to use the safe harbors that ERISA has set in place for you, those kinds of umbrellas. They want to use section 404C [of ERISA], they want to use a qualified default investment alternative, [intended to encourage investment of employee assets in appropriate vehicles for long-term retirement savings]. They want to have an outside trustee so they take some of that liability off their plate. The idea to managing risk is to spread it. That’s going to limit the amount of risk that you’re taking on.

FEI Daily: How much do couples over 65 need to have saved to supplement Medicare?

Greenleaf: Medicare has premiums associated with it and when a married couple of age 65 goes to retire, I don’t think they realize that they’re going to have Medicare premiums to pay. And currently, statistics are telling us that we’re going to need anywhere from $245,000 to $275,000 saved just for the premiums of Medicare. And the problem with this is that if you’re saving in a retirement program, you’re saving for living expenses. You’re not thinking about long-term healthcare costs. But that’s why the health savings accounts (HSAs)are gaining popularity, because it gives you a vehicle to save specifically for the retirement portion of the healthcare cost.

HSAs allow employees to save for healthcare costs. You have to be in a high-deductible plan to do it but its triple tax free — in other words it goes in before taxes, it grows tax-deferred, and if you use it for health care expenses, it comes out tax-free. There’s a huge benefit to it.

The other thing is that when you retire, Medicare premiums are means-tested, which means that it looks at your adjusted gross income. And depending on what your adjusted gross income is, you’re going to have a tax or higher premium to pay. HSA money coming out to pay for healthcare costs is not part of that means testing, which means that if you save within that, and use that money, you actually could reduce your overall adjusted gross income from a means test, which can reduce your overall premiums.

If you don’t have the information or you don’t understand the information, it’s very hard to make an educated decision. There are a lot of misconceptions about HSAs. Once people are educated and they truly understand how they work, it’s like a light bulb goes off.

FEI Daily: Why are states offering retirement plans?

Greenleaf: The states and the government are looking at the retirement crisis that we have currently across the country. And the biggest issue is that we are lacking coverage. About one-third of the individuals out there don’t even have access to a retirement program inside of their workplace. States are looking at ways to provide coverage to those employees. And that’s why they’re implementing state-run plans, which ultimately will force small business owners to either put together a plan themselves or the state is going to force them to offer this state plan and you have to auto-enroll your employees into the plan.

They’re really looking at it from two standpoints. For one, we’re in a retirement crisis. But, secondly, their fear is that if they have large populations that live within their state that don’t have a retirement program, what happens when all of these people go to retire? Their state becomes a state that doesn’t have tax revenue, people are living in poverty. That could ultimately hurt the state.