Mark: Welcome to Unsuitable on Rea Radio, the unique financial services and business advisory show that challenges your old-school business practices and the traditional business suit culture. You'll hear from industry professionals who think beyond the suit and tie to offer meaningful, modern solutions to help you enhance your company's growth. I'm your host, Mark Van Benschoten.
It's a fact that to maintain the lifestyle we are accustomed to, we need to put away between 12 and 15% of our compensation each year, yet so few are putting aside these funds, which is going to impact their ability to retire. Today, we have Steve Renner, who is a principal at Rea and a retirement plan administration expert who joins us to talk about what employers can do to help their employees save for the next phase of their life, and why this tactic is simply good for business. Steve, welcome to Unsuitable.
Steve: Hey, thanks, Mark. Really glad to be here.
Mark: Yep, really glad that you're here. You and I have spent some time over the years discussing running. You ran in college. I didn't, but we both ran in high school. You still running these days?
Steve: Yeah, not as much as I used to, but yeah, I did run for the University of Akron a few pounds ago. That's where ... running career obviously started in high school, but I did continue it at the University of Akron.
Mark: When you ran and competed, so your race was the pinnacle, and you planned for that, correct?
Steve: Correct, yeah, absolutely.
Mark: You just didn't go out on race day, put on your sneakers, and say, "I'm going to run today"?
Steve: Nope, nope, there was usually a plan for how I was going to get there to be in shape for the race.
Mark: Not to sound too Homerish, kind of like retirement, right? If the pinnacle's retirement, we need to plan for it.
Steve: Absolutely. Absolutely.
Mark: And that race is more of a marathon than a sprint.
Steve: It is definitely a marathon. I mean, the sooner you can get employees started saving for retirement, the better. I mean, I've done analysis where just waiting 10 years from somebody starting at age 30 as opposed to age 40, you know, that employee, depending on what they're making, obviously, but they could end up with half of what they would have at retirement.
Mark: Just on 10 years?
Steve: Just on 10 years, absolutely.
Mark: That's huge.
Steve: Yeah, I mean, I think we did an article, actually on, I think somebody that was 40 years old and making $40,000 a year and had she started 10 years earlier, she would have had $700 and some thousand dollars at retirement as opposed to like $380,000, something like that.
Mark: That's just a huge quality of life-
Steve: Absolutely.
Mark: Could maybe actually retire. The 40-year-old maybe still has to work, which-
Steve: Right, right. I mean, that is definitely important. I know we have a retirement plan here at Rea, and obviously-
Mark: Thank you very much.
Steve: Yes. Obviously, you can contribute to it because I'm pretty sure at age 80, even though you're doing a fine job hosting this radio show, you don't want to still be working.
Mark: I like it to point out you're the first one that's sucked up to me. I appreciate that. Everyone else is beating me up, but thank you.
Steve: No, no problem.
Mark: Getting back to ... I started with, about what employers can do. Whose responsibility, what employers can do for the employees, but whose responsibility do you think it is, not to get philosophical?
Steve: It's a mixture of both. The employer has to actually provide a vehicle-
Mark: I agree with that.
Steve: Yeah, so, with small businesses, that can definitely be the game changer when you have ... Say you're competing with another company across the street-
Mark: For talent, yep.
Steve: For talent, exactly, and you're paying the same wage as the company across the street. The company across the street has a retirement plan; you don't. Chances are, they may drift over to that company because that's a huge benefit.
Mark: Yeah, I tend to think that it's the individual's responsibility. Maybe the employer has a responsibility to offer the vehicle, make it competitive, but the employee has to make that decision for the deferral.
Steve: Yeah, and there's some things that the employer can assist to kind of steer that employee to get them to start deferring-
Mark: Such as?
Steve: Automatic enrollment is something that's pretty hot in the industry right now.
Mark: What's that?
Steve: Basically, it puts human inertia at work. Instead of your employee having to actually enroll into the plan, they have to make an election to actually not participate in the plan.
Mark: Oh, I like that.
Steve: A lot of times, individuals, they get hired, and they just get caught up in everything that's going on, and they don't turn in, and they see it come out of their first paycheck, and they're like, "Yeah, okay," and they stay in the plan. That's a beautiful way to get individuals started because that is the biggest obstacle, is just getting employees started.
Mark: Are there other ways?
Steve: You can be as creative as you want when it comes to retirement plans. You know, the biggest thing is the employer, in most cases, needs to step up and provide some sort of employer contribution. There's all different types of plan designs out there, some that are very beneficial to the owners themselves because it allows them to save big numbers and reduce their tax liability, but even though ... Those are safe harbor plans, basically, so there's no non-discrimination testing within those.
Mark: Not to get too technical, but if you could give us a 30-second version of what a safe harbor plan is?
Steve: Sure. Several different designs with the safe harbor. You can do a matching contribution, which a basic matching contribution for safe harbor is 100% on the first 3% that an employee defers in a plan, and then 50% on the next 2. If an employee puts in 5% of their pay, they're going to get a 4% matching contribution, which is nice because now you have an employee saving 9% of their compensation for retirement.
Mark: Which is good.
Steve: Absolutely.
Mark: If my beginning percentages were correct, I said 12-15. Will we accept that?
Steve: It's always nice. That kind of leads me into another thought, that helps with saving for retirement, is, and this is starting to get hotter and hotter in the industry, especially with technology, is auto-escalation. You auto-enroll your employees at a certain percentage, and in an ideal world, you're actually timing this up when you maybe provide increases to the employees, you will automatically increase their deferral percentage by 1%.
Mark: That's interesting. I thought auto-escalation was going to be something new from Google. If I understand it correctly, so you have the auto-enrollment, and then it's auto-escalation, so if they start at 5 after a certain prescribed time-
Steve: Yep, usually after a year.
Mark: It'll go to 6?
Steve: It's on an annual basis. Exactly. Yeah, and you can do it for a certain number of years. Generally, you don't want to go above 10%, but there's plans where we've set them up where ... A common, actually, automatic enrollment percentage is anywhere between 3-6%, so say you set them up at an automatic enrollment of 6% after ... Let me count that out in my head, but after 7, 8, 9, 10%, once you get them to that level, and then it kind of shuts off. Obviously, the employee can change that at any time, but it's just automated and-
Mark: It's that human inertia that you were referring to.
Steve: Absolutely, exactly, yep.
Mark: I really like that. If somebody had an existing plan, could they change that and go put that in?
Steve: Absolutely, they could, yeah. This has been a great time. The IRS requires plan sponsors to restate their plan documents every 6 years, so we're in that window right now. That window closes April 30, 2016, so if this is something that is of interest to you, you should definitely talk to your third-party administrator because now is the time to make a change because you have to restate your document regardless.
Mark: Or send an email to steve.renner@reacpa.com?
Steve: That's a great email address to send it to.
Mark: Just to get back to that April 30, so all plans have to be restated?
Steve: All IRS prototype documents. Now, some of the bigger companies use what's called "individually-designed plans"-
Mark: But, the prototype document.
Steve: Exactly. Prototypes, which are generally used by smaller employers, less than 100 participants. We've been through this with the majority of our clients already, but-
Mark: By doing this update, they could go through and get this auto-escalation.
Steve: Yeah, exactly. Because you have to ... The IRS is requiring you to restate the plan-
Mark: Perfect opportunity.
Steve: ... you might as well ... Well, yeah. If you're going to change operation of your plan, now is the time.
Mark: Make sure I understand correctly, the employee can always select, "No, I don't want to do that"-
Steve: Correct.
Mark: ... but that they have to make that-
Steve: They have to make that negative election, is what we would call it in the industry.
Mark: Your comments earlier about getting people to save earlier is just huge. Have some young nieces and nephews graduating college, going into the workforce, and ask them if they've enrolled. "No, no, you know, I just got to make my student loan payment, need to make my car payment." I've offered to say, "I'll help you," and they see that I'm serious, and they go ahead, and they do it themselves.
Steve: My nephew is 21 years of age, started at a company that was providing a 50% match up to 6% of pay, and I ran the numbers for him with the average market return over 44 years, and he was only making $23,000 a year. Automatic wage increases of 3%. If he just put away that 6, got the company match of 3, he was looking at about 1.5 million by the time he retired.
Mark: That's tremendous.
Steve: I was like ... You know, to actually show those kind of numbers to a younger kid, I mean, that makes them keep their eye on the ball.
Mark: You his favorite uncle now?
Steve: Yeah, I'd like to think so. My brother might not be happy to hear that.
Mark: Yeah, I guess I could see that. You mentioned ... We're talking about 401k plans and people deferring. A few years ago, you heard in the news about defined benefit plans switching to cash balance plans. Any change there?
Steve: Cash balance plans are becoming more and more popular, especially for small businesses that have high net income. Obviously, a great benefit for the employees, but a big benefit for the owner of the business. You know, somebody that's closing in on retirement or wants to plan their exit strategy from the business, a cash balance plan can be huge because contributions can be as high as $200,000 for the owner.
Mark: Did you say 200?
Steve: 200, yes.
Mark: Yow. Sometimes with defined benefit plans, there was a concern about the administrative costs in the actuarial report. Are those required on a cash balance plan?
Steve: Absolutely, they are, but when you look at your tax savings, the administrative costs are just a small piece of the puzzle.
Mark: What is the difference between a defined benefit plan and a cash balance plan, then?
Steve: I mean, a cash balance plan is a defined benefit plan, too.
Mark: Oh, okay.
Steve: A cash balance plan sort of acts and feels like a 401k plan, but it's got the actuarial valuation just like your grandpa's pension plan that he used to have.
Mark: That's a good way to put it. We're going to encourage ... Not "encourage;" we're going to require auto-enrollment, going to have auto-escalation ... What else can the employer encourage or put upon the employees?
Steve: Sure. I mean, one other thing that I always bring up to employers, the safe harbor match in some situations can be a little bit pricey for the employer. They have x number of dollars budgeted for their 401k plan. I like to recommend ... Sometimes I'll get a question, "We can afford to do 2% of somebody's pay." They'll be like, "Let's do 100% match on the first 2% of deferrals," and I always come back and say, "No, let's do 50% on the first 4."
Mark: That's gets you-
Steve: The same amount of money coming out of your pocket, but now you've stretched that employee to put in 4% of their pay, and a total of 6 is going into the plan.
Mark: That's a great point. I mean, same dollars amount, just-
Steve: Absolutely.
Mark: [Coloring 00:13:38] it a little bit different.
Steve: Yeah, you're just getting your employee to take on the responsibility for their own retirement, as you pointed out earlier. You feel like it's the employee's responsibility.
Mark: Yes.
Steve: It's a little bit of both in my eyes.
Mark: Yeah, you're a little softer than I am. What about encouraging the employees to meet with some financial advisor because other people have assets outside of their 401k plan or retire-
Steve: Sure, absolutely. We work with an array of financial advisors-
Mark: Is that "array" or "a Rea"?
Steve: Yes, yes, the A-R-R-A-Y.
Mark: Okay, all right.
Steve: The majority of them are fantastic at conducting employee education meetings, doing one-on-ones with the employees when they come out once a year. Out of those conversations spawn, okay, in addition to the 401k, which they strongly encourage them to participate in, they can develop a plan for other assets that they may have, what their plans are for retirement once they are getting closer to that age. A financial advisor is a key piece of the puzzle.
Mark: Puzzle, right. You would hope that the employer's offering, like, "Okay, Mr. Financial advisor, you're going to sit down with these employees that want to." You can't make them.
Steve: Yeah, so generally, what we recommend is we recommend that they conduct a meeting with the entire staff when possible, especially if it's a smaller group. If you can get 30 people in a room for 30 minutes, the advisor can do educational meetings, and then he generally will make himself available for-
Mark: Or she. Father of 3 daughters.
Steve: Yes, or she. Sorry about that. The advisor will make themselves available to do one-on-one sessions with the employees.
Mark: That's great. That's great. Anything else that you would think that the employer can offer up to get people to save?
Steve: The biggest thing is adding a retirement plan. There's still ... The numbers are still kind of staggering as to-
Mark: Really?
Steve: ... how few businesses under 100 employees-
Mark: Don't have plans.
Steve: ... don't have plans. Well, don't have plans that offer the ability for the employee to-
Mark: To defer.
Steve: ... participate. Yeah. There are some set plans out there where it's just an employer contribution, which is nice, also, but providing that additional ability for the employee to defer is huge.
Mark: Getting back to my theory that it's the employee's responsibility. If they don't have a vehicle, then it would be kind of detrimental.
Steve: Right, right, but studies definitely show if there is not an employer-sponsored plan in place, employees just-
Mark: Don't.
Steve: They don't save. At the end of the year, we see that question every year about, "Do you want to put this much in an IRA?" It never happens.
Mark: Correct.
Steve: It's a lump sum.
Mark: People don't have that sitting around.
Steve: Exactly. That's been spent at the grocery store long ago.
Mark: Right. A little bit each week doesn't feel as painful as-
Steve: Exactly. I tell that to a lot of people that I come in contact with, especially younger folks. You know, start out with 25 bucks of pay. You won't even miss it.
Mark: That's a Friday night.
Steve: It is a Friday ...
Mark: "You want me to stay home on a Friday night?"
Steve: You're supposed to be on my side.
Mark: Oh, okay. All right. I agree with you; they should put away the $25, and they probably wouldn't miss it.
Steve: Absolutely. Really, if you're doing it on a pre-tax basis, it ends up being 20 bucks less than your paycheck. Let's say you get a 50% match on top of that, now for that 20 bucks, you've now put $37.50 in your plan.
Mark: That's powerful when you put it like that.
Steve: It is. Thanks.
Mark: I mean, as I stated, I think it's the employee's responsibility, but I think if we have a stable ... we don't have a group of people that don't have any money become some sort of burden on our society, I think we're all going to be better off. If you all save a little bit, we're not going to have a group of people out there that say, "Now we need to provide this because they don't have housing; they don't have food."
Steve: Yeah, I actually wrote down a statistic that I saw today. Today, right now in 2015, there's 40 million senior citizens in the US. That number's expected to be 90 million by 2050. That's a lot-
Mark: Huge.
Steve: Yeah-
Mark: Right, so they don't have ...
Steve: [crosstalk 00:18:17]. If you don't have retirement savings, that's going to be a huge-
Mark: Correct. It could be a drain on our economic-
Steve: Absolutely. Just thinking of it from somebody that owns a small company, do you want the guy that's 75 years old still walking around the shop? He's going to be higher paid because he's been there forever.
Mark: And driving a forklift. No thanks.
Steve: I don't want to be on the floor [crosstalk 00:18:42].
Mark: That's a great point. Steve, before we wrap up, there's one question we ask every guest.
Steve: Okay.
Mark: We've gotten some unbelievable answers. If you could have one superpower, what would it be?
Steve: I would say it would be pretty cool just to be able to become invisible so you could kind of walk in any room and hear a conversation. I see that look in your eyes. Don't go where you're thinking.
Mark: Yes.
Steve: Anyways.
Mark: Thank you for joining us today, Steve. Thank you to our listeners for tuning in. If you want to learn more about the business benefits of offering an employer-sponsored retirement plan, we have compiled a list of great resources on our website. You can get them by visiting www.reacpa.com/podcast. Don't forget to subscribe to Unsuitable on iTunes or SoundCloud, and remember to share the wealth with your friends and colleagues. Until next time, I'm Mark Van Benschoten for Unsuitable on Rea Radio, encouraging you to loosen up your tie and think outside the box.
