The Future of Retirement By: Gabriel PotterMBA, AIFA®

“ ...Retirement is going to be in our future whether we want it or not. It’s whether we’ll have a dignified and satisfying retirement.”

It may be a trite sentiment, but change is the only constant. Given the changes to the retirement landscape – legal, demographic, and financial – employers and employees can benefit from the advice of a qualified guide to navigate through the changing environment, preferably one with broad experience and accepted expertise. 

Robert Kaplan, the National Training Consultant of ING, is a member of the American Society of Pension Professionals and Actuaries (ASPPA’s) Government Affairs Executive Management Committee. He is also a former member of the American Institute of Retirement Education (AIRE), and former member of the Board of Directors of the National Institute of Pension Administrators (NIPA). In 2009, Bob was presented with NIPA’s Lifetime Achievement Award for his contributions to the retirement plan industry. He has provided testimony before the Treasury department on 401(k) and other retirement plan issues and is a frequent speaker at industry events for ASPPA, NIPA, and the American Bar Association.

“I very simply ask, “What are you going to do for money during your retirement years? ... Employees will kick around a lot of different areas, but when it really comes down to it they’re going to realize that they are going to have to save for themselves.”

Given his expertise, Robert describes some of the changes to the retirement landscape, and does his best to foresee potential changes in the future. Over the course of conversation, he offers his advice and insights to employees, employers, and government regulators trying to make retirement in the US the best proposition it can be.

Confero Magazine: The US has a fiscal problem and some have suggested changing the rules on how retirement savings and income is taxed to make up for the shortfall. How likely do you think this is? What sort of changes might you predict? 

Robert Kaplan: In the current environment that we’re in, nobody quite knows what the folks in Washington are going to do. If we had to take our best guess—and this is from being experienced going up to Capitol hill and being involved in some lobbying efforts and industry organizations—where I think we are with all the discussions about either limiting total deductions or trimming some of the limits, probably every deduction is going to feel the pain of tax reform. That being said, the retirement plan industry, although not a sacred cow, is very sensitive to participants who are happy with their plans, who tend to be voters, and who tend to be very vocal every time Washington talks about changes or not giving private employers the incentive to sponsor retirement plans. So, while nobody knows exactly what’s going happen, we might see some sort of minor limitation or minor cutback in the limits, but at this point I would not (and this is just a guess, nobody is an expert of this area when you’re dealing with Washington) expect the scrapping or tearing apart of the 401K or defined contribution system. The backlash from voters would probably be quite extensive and that’s something that our legislators would look forward to.

CM: Given the meager US growth rates and fiscal spending concerns, what are your projections for the future? Is retirement going to get more spartan for future generations?

RK: Unfortunately, as much as many participants have gut reactions when they’re in tough economic times or even employers who are cutting back on their plans would wish to work longer, I think the reality of the situation, when you start to look it, is that when people reach retirement age, unfortunately, either between themselves or a loved one or a spouse they have to take after, or a disability kicking in, or inability to perform the functions of the job that they would like to have, retirement is actually going to be more of a necessity than a lot of people who don’t have the forethought would think about. So the initial reaction by a lot of folks who want to delay saving for retirement would be, “I’ll work forever.” The studies show that that’s not a realistic approach, so retirement is going to be in our future whether we want it or not. It’s whether we’ll have a dignified and satisfying retirement.

CM: Employees are already falling short of their retirement goals, so what steps can employees take to mitigate the damage? 

RK: Well I think the most important aspect of this is the first step, and that is saving for retirement. And you’re asking the question, what can employees do? Before we get to that, I think the people in Washington who are laying out the rules, the Department of Labor and their educational outreaches, need to be very clear with employees that retirement probably is going to be in their future. They need to look at their plan. I think that needs to be taken down to the employer level with further education. The most successful individual meetings I’ve ever participated in, when anybody ever poses an objection or this won’t work, I very simply ask, “What are you going to do for money during your retirement years? How do you want to live? and then the hardest thing for people do to at that point— I’m talking about the ones who are asking the question—is to be quiet and wait for the answer, because when posed with that question, employees will kick around a lot of different areas, but when it really comes down to it they’re going to realize that they are going to have to save for themselves. Once that reality kicks in and hopefully we will do a better job of educating our youngsters and our kids about saving for retirement and starting early and the best people to do that is the current 401k participants to insist their kids, when they get into the work force, start saving. We are starting to see a lot of that kick in and we need people to recognize its not okay or it’s not an entitlement that we go to Disney World or we go to Las Vegas every year if we’re not saving enough for retirement because when the time comes to retire, we’re not going to be able to do it. And so I think educational outreach that’s much more effective needs to be started from the government, from the employers and getting people to realize, it’s up to them.

CM: Another key trend is the increased legal responsibility. We’ve spent much of the past year describing the responsibilities laid out in ERISA 408(B)(2), but the industry in general isn’t very far along in compliance. Any insights or suggestions for vendors or plan sponsors?

RK: Educational outreach—which has started already from all those people who are complying. The 408b2 that you’re referring to is a service provider fee disclosures, which we all had to do with the deadline of July 1, 2012 and obviously going forward in the future any time that we’re going to do business. What the educational outreach needs to be is “hey, we’ve done what we’re supposed to do. We get all the paperwork. We need to make sure that the plan sponsors understand that they need to evaluate and create files about fees being reasonable, about fiduciary steps that they are taking.” And I can tell you from the practices that I’ve dealt with in the Advisor world, in the CPA world, and in the recordkeeper world, the ones who are the best at this are the ones who were following through on it: The ones who are compliance oriented, are educated, and making sure their clients are aware of it. They do it for self preservation, so the clients realize that when somebody comes along and says, “ I can do it better and I can do it cheaper” that that’s not always the case if they are not going to fulfill all the information and detail that the plan sponsor needs to have in their file. So I believe that that outreach has started. What we’re going to see as an industry trend is those people in the advisor world, who are not committed to working quite often with retirement plans (we call them the one or two planners who only have one or two small plans, its not major part of their practice). We are already starting to see industry data where they are disappearing. The anticipated relief in July of this year of updated, investment manager, fiduciary regulations putting more responsibility on the investment manager and on the financial advisors are going to require people to be devoted and experts in the retirement plan space. It’s going to take a little while but I believe that the steps the Department of Labor have taken with the fee disclosure and with updating the fiduciary roles are going to strengthen the quality of service providers who are available to plan sponsors in the retirement plan space.

CM: Are there any suggestions you’d offer to Plan Sponsors to improve their retirement plan? Either in terms of improving the results of their employees, or protecting the interests of the company or its board members? 

RK: Yes. One of the key things that’s overlooked with all of this fee disclosures We talk about “fees, fees, fees”, but our friend at the Dept. of Labor could not be clearer: the plan sponsor has the responsibility to make sure they are getting value for those fees. So, as my late father used to say “cheapest is not always the least expensive.” It’s shopping for value, providing somebody that will work with the plan and then in the advisor world and that will work and educate plan participants and show the value in return for the fees that are being paid so that they can work with participants to create goals, to create model allocations, to create menus that work, to keep an eye on the investment choices. So, if I could wave my magic wand, it would be for plan sponsors to understand that they need to pick advisors and other services providers that provide value to the long-term success of the plan. People that will work with them to increase not only the assets in the plan, but the number of participants that are that are deferring, the average deferral amount or savings amounts that will go up and that can only come when participants are provided the education by these types of advisors who are demonstrating their value. So, that is my wish that plans would have people who are committed to the overall success and health of the plan and not just focusing on the cheapest available.

CM: If you could suggest anything to Washington DC to improve the retirement landscape in the US, what would you recommend? Perhaps pursuant to some of your key themes of fee transparency and educational outreach?

RK: The magic wand that I would wave over Washington would never be to require people to save a certain amount. Because my fear there is that if we start you off at let’s say 3%, you’re going to think, Washington grants that to be the right number and I think most of us realize that’s not the right number, that’s way too low. The magic wand I would have instead beating up plan sponsors who are trying to do their best with the minutia of the regulations and ridiculous penalties. For them to create a focus which would encourage more employers (only about ½ the employers in the country actually sponsor a retirement plan). So make it easier for employers so that the rules are not so onerous, so that they would be encouragement for the private sector to have more plans and reach out and not fear of making minor errors with huge penalties associated with them and risk associated with them. So that would be my wish, that Washington creates an environment where they deem it necessary for them to create rules to encourage the growth of the private retirement system, instead of trying to perfect the plans that are out there, because reaching for perfection comes with quite a price. 

“What we’re going to see as an industry trend is those people in the advisor world, who are not committed to working quite often with retirement plans ... are disappearing.”

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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