By John P. Keenan, CFP, AIF. Partner, Signature Estate & Investment Advisors, LLC.
In order to be a progressive, forward thinking government contractor, you have to be adept at navigating a maze of challenges in order to win bids. With sequestration, continuing resolution, and lowest price technically acceptable being the equivalent of “lions and tigers and bears, oh my”, it’s no wonder that many contractors are finding it difficult to stay on the golden road to Oz.
The ongoing debate surrounding lowest price technically acceptable is a simple one – how do you find the best value while weighing both cost and quality? Is it possible to achieve good performance when contracts are being awarded to those who barely meet minimum requirements at the lowest possible cost? While everyone has his or her own opinions about the effectiveness and acceptability of this contract evaluation method, we find that many government contractors are unaware of the reality that they use the same standard when running their business; specifically as it relates to human capital and employee benefits.
As financial advisors specializing in retirement plans, we work with government contractors to help them achieve greater retirement outcomes for themselves and their employees. In the beginning stages of our independent retirement plan evaluations, we often hear the same thing from owners; “I want to get the best possible outcome, I don’t want to worry about the requirements and I want to decrease costs.” Sound familiar? If you don’t think a lowest price technically acceptable standard works for the government, you will probably agree that it won’t work for your organization either. In order to achieve the best possible results for you and your employees, you need to shift your thinking toward value creation when it comes to your retirement plan.
The “lions and tigers and bears” of retirement plans include ERISA compliance/fee disclosure, the national retirement income crisis, and hesitancy toward innovative plan design.
ERISA Compliance & Fee Disclosure
Last year, the Department of Labor made major rule changes to retirement plans – some of the most significant changes in 30 years. Section 408(b)(2) and Section 404(a)(5) address required fee disclosures at both the plan sponsor and plan participant levels. All retirement plan fiduciaries should be aware of these new regulations. If you’re wondering whether you could be identified as a plan fiduciary, the answer is most likely yes.
According to the Department of Labor, if you hold any type of decision-making authority over administration of the plan or more importantly its investments, you are considered a fiduciary to the plan. As a plan fiduciary you are federally required to act in the participant’s best interest, pay only “reasonable” plan expenses, document the fees (both direct and indirect) clearly in writing, and carry out your duties following the “prudent man” rule.
These regulations were in response to a wide misconception that the retirement savings problem in America could be largely attributed to the “high fees” that participants pay in their retirement plans. A U.S. Senate report stated in July 2012 that Americans are $6.6 trillion underfunded for retirement and they needed to point the finger at something – fees were the first target. Similar to the lowest price technically acceptable method, the knee-jerk reaction is to cut costs. While it is true that fees can absolutely erode retirement savings over time, these regulations will do very little to move the needle in solving the national retirement income crisis. This crisis is a savings problem, not a fee problem.
National Retirement Income Crisis
A recent study by the Employee Benefits Research Institute paints a dreary picture when it comes to the retirement savings of Americans. This study concluded that 56% of the nation’s workforce have an entire life savings of less than $25,000 and only 2% of Americans have an adequate pension or retirement account . The statistics are endless and staggering. Americans will not have enough money to fund their retirement. We will have to work longer, decrease our standard of living and hope that our minimal savings can cover us if we need to fund a long term care health need.
There is no simple solution for the national retirement income crisis but the reality is that we are all responsible; individually, organizationally and nationally. It is critical to deal with this crisis sooner rather than later, whether through better savings instruments, more incentives to save or even mandatory savings requirements.
Hesitancy Toward Innovative Plan Design
During our work with plan sponsors we often find hesitancy toward reviewing options that can drastically enhance the retirement outcome of their executives and employees. Typically most government contractors are using antiquated matching designs that are only focused on passing the testing or as a way to keep up with competitors. Either solution is probably costing more money than needed and also not delivering desired retirement results for all of your employees.
Innovative plan design strategies such as plan automation, census driven retirement gap analysis and a combination of qualified/non-qualified retirement plans will have a tremendous impact on your plan. These solutions can actually save your company money while providing tremendously greater value through positive impact on retirement outcomes.
As we all face our own “lions and tigers and bears” it is important to remember what the desired outcome is. Just as lowest price technically acceptable standards are unnecessarily hindering the government outcome, your organization may be doing the same to employees and executives by taking a similar approach. Choosing the right partners and framing your focus toward value creation versus cost cutting will provide dramatic results for your organization; both in recruiting top talent and building a competitive organization.
Five Action Items to Enhance Retirement Outcome:
- 1. Hire professionals who are capable and qualified to assist in the implementation of monitoring and benchmarking your plan
- 2. Run a retirement readiness assessment to determine what the current outcomes from your plan will be for all executives and employees
- 3. Determine the necessary savings shortfalls and use automation features such as auto-enrollment and auto-escalation to correct insufficient savings behavior from participants
- 4. Considered non-qualified retirement plan options for to help recruit, reward and retain key talent
- 5. Begin to track and monitor results of retirement readiness annually to provide conclusions about improved participant outcomes
John Keenan is a partner with Signature Estate & Investment Advisors, LLC. He can be reached at email@example.com.