Mark: Welcome to unsuitable on Rea Radio, the award-winning financial services and business advisory show that challenges old school business practices and the traditional business suit culture. On the show you’ll hear from professionals who will challenge you to think beyond the suit and tie while offering you meaningful, modern solutions to help you enhance your company’s growth. I’m your host, Mark Van Benschoten. Do your employees have access to a retirement plan? How often do you consider whether or not your plan is effective? Are you and your employees taking advantage of this benefit and if not, do you know what you can be doing better? Today’s guest is Angie Isakson, a qualified 401k administrator and a manager of Rea’s benefit plan services team specializing in retirement plan compliance, plan administration and plan design. Wow, that’s a lot. In other words, when you’re ready to get more from your 401k plan, Angie is the person you’re going to want to talk to. Welcome to unsuitable, Angie.
Angie: Thanks, Mark!
Mark: Is all of that stuff true?
Angie: Yes, I am very well-rounded in the retirement industry.
Mark: How did you get started in that because, you have an accounting degree from Youngstown State. How did you get started in plan administration?
Angie: I started out in public accounting. I worked for one of the Big Six way back when.
Mark: Wow, you’re dating yourself.
Angie: Yes, I am. I then worked for a smaller CPA firm. I decided that I needed to specialize. I wanted to specialize in something. I didn’t want to be broad range. I kind of landed into a company called The Ohio Company where they specialized in retirement plans. That was like 20 years ago. Ever since then, that’s how I’ve educated myself over the years in terms of retirement plans.
Mark: Now you’re an expert.
Angie: I hope so. I think so.
Mark: I said it so it must be true. I also understand you like to read. What types of books do you like to read.
Angie: Oh, gosh. Anything that doesn’t require a lot of thought. I read a lot of fiction … Anything mystery, romance …
Mark: Harlequin?
Angie: I’m not so much anymore. Back in the day I did.
Mark: My 91 year old mother reads those. I think it’s terrible.
Angie: Yeah, that is funny.
Mark: Like, “Mom, what are you reading?” She’s like “Leave me alone.” I’m like “Okay, all right.” All right. You decided you want to specialize?
Angie: Right.
Mark: Your timing was great. Obviously, the move from back then … The defined benefit plans were so common in the marketplace. People moving out of those, moving to 401k plans. Your timing was great for continued employment, right?
Angie: Correct. You never want to say never but, I’ve never really been worried about my job and whether the industry is going away.
Mark: Do you think … I think most people have an attitude of “Well, I have a 401k plan so I’m okay.” That’s probably not the right attitude.
Angie: No, that’s not the right attitude. Unfortunately, the 401k plans, the defined contribution plans are a wonderful thing but, people aren’t utilizing them to the best of their capabilities. I would say that they’re not as successful as we would want them to be.
Mark: Oh, really?
Angie: Yes.
Mark: You said defined contribution 401k plans. Can you just maybe give us a little bit … What is a defined contribution and it’s difference between a defined benefit?
Angie: Okay well, the defined contribution plan employees mainly put money into that plan and set up their selves for the future. There is no set formula of how much money you’re going to get at retirement. It depends on what you put in and what the employer may match or put in for you. In a Define Benefit plan, there is an actuarial factor involved and you have a set formula that says “At such and such age, this is how much money you are going to get.” That is not true in a Defined contribution plan.
Mark: Some people refer to them as DB plans and DC plans?
Angie: Correct.
Mark: What is … Somebody looks at their 401k plan or other defined contribution plan. What are some things they should be looking at?
Angie: I’m kind of looking at this more from a plan sponsor view.
Mark: The plan sponsor would be the employer?
Angie: It would be the employer, correct. They are the ones that are responsible for putting something out there for the participants to be able to participate into in the first place. It has to start there. It has to start with the plan sponsor. What I find as a successful retirement plan is a retirement plan where the majority of participants are going to be able to retire when that time comes or whether the participants are currently on track for retirement. Currently, less than 25% of people at retirement age are ready to retire.
Mark: Not to ask a political … Is that the employees problem? Did they fail or, the plan sponsor employer fail?
Angie: I think it may be a combination of both. 401k plans weren’t set up originally to be the sole … Not that they are the sole but, to weigh so heavily on what your retirement income is going to be. Defined benefit plans were supposed to be that. Over time, that has evolved. Now, the DC plans, they’re not … They’re kind of falling behind in terms of getting people ready for retirement.
Mark: Is there any concern with the department of labor or somebody stepping in and having major overhauls of the system? Like, “Wait a minute, we’re not meeting the tests. We’re having 25% are able to retire come normal retirement age”?
Angie: I don’t know … I don’t see that the government is going to completely come in and override. I could be wrong on that. I think what they’re trying to do, the industry is trying to do and what us as TPAs and financial advisors should be doing is educating the plan sponsors more and the participants more in terms of how they need to get there. Better matrixes have to be out there for plan sponsors to be able to track and for participants to be able to realize “I’m ready.”
Mark: Track what? Track the individual employees’ balances?
Angie: A little bit of both. I would say in a successful retirement plan, at least 90% of your participants should be participating in it. They should be to track “Is that true in my plan?” If it’s not, how can we get there? You should be also tracking how much they actually are deferring. Just because they’re participating, that’s not enough. They should be deferring at least 10% of their pay. Then the employer should be contributing as well either a match or some kind of employer contribution on top of that.
Mark: What if the employer has that “I need to offer a plan to be competitive. It’s enough for me just to offer a plan. If they want to defer, that’s great.” What’s the incentive for the employer to have a plan to make it a robust plan?
Angie: There’s a couple incentives. One is there are tax deductions for the company. Another incentive is they’re participants, too. They want to be able to retire and defer income. Another incentive is, you do not want a huge workforce that is at retirement age and they don’t have enough money put away to retire. They’re not as productive and efficient. You don’t want that. You want happy employees, productive employees, employees ready to retire when they want to.
Mark: Someone that gets to retirement age, they have enough money to retire, they’ve contributed to the company, they’ve gotten paid for that, they got their retirement. They go off and we can … I don’t want to say replace them. Just the normal progression of bringing in somebody new and continuing your business.
Angie: Correct.
Mark: The employer shouldn’t view it as a sum cost. It’s an investment for continuity, to continue the business.
Angie: I would say yes. Yes.
Mark: That’s very profound of myself.
Angie: Yeah, you’re good at this. You know your stuff.
Mark: No comment. What about the cost of compliance? We’re going to have this plan like “Oh, I can see the benefits to my employees but, I can also see the benefits to myself because it is all about me.” What’s that cost of compliance? How much is that? Is it a big number to comply with the laws?
Angie: You’re not really just by enhancing your plan design such as doing automatic enrollment, which is really the key to getting close to your 90% participation right and then, that auto escalation. In addition, getting the people to defer 10%, you’re not really changing the cost of how much it’s costing to run your plan doing that. It’s just better educating. If you already have a plan in place …
Mark: There’s really not much incremental.
Angie: There’s not much in cost.
Mark: You mentioned auto enrollment, can you explain what that is?
Angie: Auto enrollment is the opposite of what we’re currently used to in a lot of 401k plans. Currently you’re asked if you want to defer into a plan, take money out of your paycheck and put it into the plan. Auto enrollment is, you automatically are opting in at a certain percentage rate? You are allowed to opt out if you would like to. This has been in the industry for maybe several years now but, it’s gradually getting more popular. There are statistics out there showing how well it is working because, people don’t like change. People know they should be getting ready for retirement but, they want the status quo. They don’t make that election but, if they’re forced into that election, they know it’s the right thing to do. They continue on and do it. That’s what automatic enrollment is. Automatic escalation then … I would recommend that you auto enroll people at 6 percent of their pay and then auto escalate every year preferably around cost of living increase time. Like 1 or 2 % of their pay.
Mark: They could opt out of that also?
Angie: They could opt out of that. They could just stay at the 6% or, they could do 5 or they could do 10, or they could do 15. There’s always the option to opt out. People tend to kind of let it happen once it starts.
Mark: Do those people at the end … I’m asking you to project here. Do you think people get to the end of the road and say “Thank you for that discipline, thank you for auto enrolling me, thank you for auto escalation? Do you think any employer would ever hear that?
Angie: Probably not. I think they would just take it for granted as “This is the road map that’s laid out to me so that I can get ready for retirement. They’re telling me this is what I should do so, this is what I’m going to do.” I don’t think they’re going to think “I’m going to thank my employer for that.” In my opinion.
Mark: I struggle with … whose responsibility is it to provide for that employees retirement. Who has ultimate responsibility? I would say it’s the employee.
Angie: Correct. I would, too.
Mark: That could be through selection of employer, for saving, there’s a lot of choices that that employee makes. It probably comes back to the greater concern is “Well, I don’t want an 80 year old employee working my press because, they need to work. That person probably shouldn’t be working. I should be able to get somebody maybe a little more able bodied.” That’s my concern as the employer, I’m like “I need to make sure that guy is out here. Not going to cause me problems. I need to terminate him. He has enough money to retire.” There’s a weighing there of those costs and those concerns.
Angie: Right. I guess it all comes back to education. Maybe a constant reminder, an annual reminder, annual meetings to show people statistics, to show people how their plan is doing and peer pressure will come into play where they say “Hey, 90% of the people in my company are doing this and I’m not. I should be doing it.” I really think it just all comes back to education. It’s the best we can do.
Mark: Do you think some people get to the point … Well, you know “I’m 45, I should have started 20 years ago but, I missed it so I’m not going to do anything now.” I would say “No, you still should do something. It’s never too late to start.”
Angie: I don’t think … I think if you’re a rational person, you wouldn’t say that. You might regret the fact that you didn’t start until then but, there still comes the time where you are going to need to retire and want to retire so, you have to do something.
Mark: Something, right?
Angie: Yeah.
Mark: Not to get political but, I do think there is a … It’s going to sound very harsh but, a burden to society. Somebody who can’t work, shouldn’t be working, physically, mentally, whatever and doesn’t have money to pay for their care. Who’s paying for that? You can’t just put that person on the street. Somebody has to pay for that. They should have been taking care of that through their working career, while they’re earning money.
Angie: I agree with that.
Mark: Thank you for saying that.
Angie: I don’t know the solution to that other than to try the best we can do.
Mark: Correct. Things I’ve taken away is you should try to get 90% of your employees participating.
Angie: Correct.
Mark: You would like to see them at 10% deferring of their compensation in a 401k plan.
Angie: Yup.
Mark: A minimum of annual meetings to talk about … I would assume you would want to talk about what does retirement look like financially?
Angie: I think annual meetings should first start with the plan sponsor. Annual meetings with financial advisor and the record keeper and or the 3rd party administrator. Currently, they are going on but, the focus right now has been in so much on investments. How the investments are doing.
Mark: The annual meeting you refer to is just those components. Those people, the plan sponsor, the administrator, okay.
Angie: They should start there. From there, yes, there should be an annual meeting for the participants to be educated but, it should start with the plan sponsor in my opinion.
Mark: Okay. I need to make sure I understand. Do you also think that there should be meetings with the employees? The plan participants?
Angie: I think so, yes. I think they should constantly be reminded about the fact that there is this plan. What this plan offers. What the statistics are in terms of their own personal plan in the industry so that they’re constantly reminded … We don’t think about this every day. Unless you’re people like me that work in the industry every day, you’re not constantly thinking about “Am I ready for retirement? How much do I have put away?” That kind of thing. I think an annual meeting is important.
Mark: You see the advertisement like, “What’s your number?” There’s some investment company that has people charting what they think their number needs to be. Those numbers are huge. It could be overwhelming to somebody. Saying “Oh, I need a million dollars? There’s no way I can save a million dollars.” I think if they start young enough … If they start any time, make some sacrifices. Maybe not going out both Friday and Saturday, just going out on one of those days, you can save that through employer contributions and investment earnings.
Angie: Right. I think maybe part of the annual meeting that could help is to show them an example of how much this money would be due to to compounding interest ten years from now, 20 years from now, 30 years from now. They’ll see that “This 20 dollars does make a difference. This whatever amount does make a difference.” The industry is going more toward the statements that come out quarterly that the participants are required to receive. They should be renamed maybe to like a lifetime statement, instead of a quarterly statement. An emphasis to put more on greater return over a lifetime for this fund versus what the quarterly return is.
Mark: That’s a great suggestion.
Angie: Emphasis too on “This is how much money you have. This is how much money that would look like as a monthly income at a retirement.” People get a better understanding of what that means. Maybe somebody has 100,000 dollars put away and they think “Wow! That’s a lot of money!” Yes it is, but, this is only what it will be monthly.
Mark: Right. That’s kind of scary stuff.
Angie: Yeah.
Mark: Out there. We’re running out of time here. Before we wrap up, I think you’ve listened to some of our podcasts so, you’d know that there’s a question we ask every participant.
Angie: Correct.
Mark: If you could have one super power, what would it be.
Angie: Yes, I have the benefit of knowing you were going to ask me this question.
Mark: Oh, benefit. You tied that in! I see how you tied that in!
Angie: You like that?
Mark: Yeah.
Angie: I have two boys. I’m outnumbered in my household.
Mark: I have three daughters, I’m outnumbered.
Angie: You know how that works, right?
Mark: Yes, I do.
Angie: We do a lot of video games at our house …
Mark: Playstation? Xbox?
Angie: We don’t have Xbox. We have Playstation 2, 3 and 4. We have the Wii U, we have Gameboys, DS’s, whatever. I don’t do them and they know better than to ask me because, I am terrible at them. Anyway, my superpower would be being able to teleport. That would be awesome if I could just be here one minute and say “I want to be in Hawaii!” Teleport to Hawaii. Even just to teleport to work. I don’t want to have to deal with the driving and the traffic.
Mark: Correct.
Angie: That’s my super power. I want to be able to teleport.
Mark: I like that. When you get that, will you share it with me? Not everybody, just me.
Angie: I think it’s a portal.
Mark: Oh, there you go!
Angie: That’s video games. It’s a portal. I’m sure I could share it with whoever wants it.
Mark: Thank you for including me. Thank you again for joining us on unsuitable today, Angie. Another big thank you to our listeners for tuning in. We want to know what you thought about today’s episode. Send us your feedback to podcast@reacpa.com then, head over to SoundCloud or to iTunes and share this episode on social media. We also have some more retirement plan design and resources available at www.reacpa.com/podcast. Until next time, I’m Mark Van Benschoten from unsuitable encouraging you to loosen up your tie and think outside the box.
