For many small business owners, offering their employees a retirement plan is often a luxury rather than the norm.
For those that do offer retirement plans, many of those plans often can be accompanied by administrative headaches and burdensome costs. But with many insurance companies and financial firms now offering various types of lifetime guaranteed income plans that allow people to invest more aggressively, small businesses now have more ways to help their workers save for retirement and, hopefully, improve worker recruitment and retention.
Since the 2008 financial meltdown and the use of defined benefit plans dwindles, the government and private industry have been encouraging the creation and use of tools such as 401(k) annuities and pension-like funds that provide guaranteed lifetime income streams immune to market fluctuations.
“It really is investment insurance,” said Michael Preisz, founder of Preisz Associates in Oregon and advisor at the Institutional Retirement Income Council (IRIC). When small businesses hear about these plans, offered by companies like John Hancock, Prudential and The Hartford, “they think it’s too good to be true.”
“When a plan sponsor really understands this and they themselves are 58 and older, they jump in with both feet,” he added. “What we’re finding is, with these kinds of advance tools, when handled properly, we’re seeing employee turnover go down and people staying employed.”
Here are six tips for small businesses owners interested in offering a lifetime guaranteed income plan to their employees:
1) Have a financial advisor who is familiar with the various offerings available in the marketplace and will meet with employees one-on-one. Request a document comparing and contrasting benefits of various programs.
2) Don’t seek out a guaranteed income plan if you’re looking for a low-cost, low-maintenance plan just for the sake of having one.
3) Pick a plan you understand. A common complaint against many of the plans being introduced is that they are too confusing, particularly to people who already may be dissuaded from investing because they don’t understand the system. “Some of these solutions, mathematically, they may sound wonderful, [but] it’s very hard for the average person to understand them. And actually, it’s very hard for the sponsors to understand them,” said Robyn Credico, senior consultant at Towers Watson, which specialize in employee benefits.
4) Make sure to find a plan that does place the administrative costs on the employer—find one that has a third-party, such as the insurance provider, who bears those costs instead.
5) Find a product, such as an annuity-based plan, that isn’t subject to market volatility or has the employer bearing the brunt of that volatility. Also be sure the plan offers liquidity and portability, the latter of which is a particular problem with many plans on the market now.
6) Once you find a plan, encourage workers to participate. Much like health-care plans, the more people who buy it, the more the risk is pooled. Plus, once workers realize they can boost their nest egg more with lifetime income plans versus just putting more money into bonds or in a savings account, they’ll be incentivized to stay at their place of employment.
“It’s got to be simple, easy to understand, and it’s got to be guaranteed,” said Tom Foster, vice president and national spokesperson for The Hartford's retirement plans. “As an employee and as an employer as well, I want to deliver something to my employees that when they get it, it’s going to be something they understand and utilize.”