In Invest We Trust
Pension Reform Act to impact your investment
By David Bernard
A body at rest tends to stay at rest. A body in motion tends to stay in motion, unless acted upon by an outside force. This basic law of physics can be applied to most people’s retirement planning—risking too much or too little and seemingly too apathetic or uninformed to affect change.
The Employee Retirement Income Security Act of 1974 (ERISA law) obligates employers who offer a defined contribution plan, such as a 401(k), to act as that outside force, pushing or redirecting their employees’ retirement investments. Until recently, plan sponsors were pretty limited by the types of plans and guidance they could provide for their employees. The newly signed Pension Reform Act of 2006 creates some tools and opportunities to help both plan sponsors and participants.
The new legislation is focused on improving employee education, increasing participation and changing under-funded or poorly performing plans. If you offer or are considering offering your employees a defined contribution plan, it’s time to jump on this bandwagon and take advantage of the new opportunities.
Here are a few things to consider:
- Work with a broker or agent you trust to fully disclose information and who benefits from ensuring that you have the right plan for you and your employees. It’s not in your best interest to work with someone who benefits financially based on specific investments or products you select. A fee-based advisor has a fiduciary responsibility to you and your employees and is not motivated by commissions. How people get paid often has a big impact on how they behave.
- With the help of an experienced advisor, you can adhere to the Department of Labor guidelines for complying with 404(c) regulations. The keys are to know what the regulations mean and being able to document and defend what you have done. Having a compliance strategy with documentation is equally as important as being in compliance.
- As a plan sponsor, you are responsible corporately and privately for safeguarding the assets of your company’s plan. This means choosing, monitoring and continuing to oversee your plan. Annual reviews and ongoing oversight will help ensure that your plan evolves to meet changing needs and legislation.
- Finding the right plan involves selecting the right investment choices and the right education program. One size does not fit all when it comes to retirement investing, and there are new options available. Offer your employees a well-researched retirement plan from an unbiased provider.
- Encourage your employees to participate through automatic enrollment and matching contributions. Employees tend to improve their savings rate when employers offer incentives. This can also serve as an effective way to attract and retain great employees.
- The annual “educational” meeting to educate workers on investments and register new enrollees just doesn’t cut it any longer. Employees need help not only managing their retirement plan assets, but also with understanding how these investments fit into their other financial considerations. They need individualized, objective advice so that they can achieve their retirement goals.
The burden is on plan sponsors to help employees realize that they can no longer be passive when it comes to their retirement—and Congress has just helped ease the burden. With these new tools and the increased forces, we should see a whole generation of active and engaged retirement investors—no more retirement planning by inertia. We’ll have workers who are well equipped and in top shape to reach their retirement goals tomorrow. David Bernard is the president of Wealthpoint.
|At a Glance
The Pension Protection Act of 2006 could greatly raise the number of workers participating in company-sponsored savings accounts by allowing the automatic enrollment of new employees. The legislation also will make it easier for plan sponsors to offer investment advice to 401(k) savers. Over the last decade, personal saving as a percentage of disposable personal income has steadily fallen. In the second and third quarters of 2005, the saving rate, for the first time in the last 60 years, has fallen into negative territory—meaning that Americans are, as a whole, spending more than they save. In the third quarter of 2005, the personal saving rate was 1.5 percent, according to the U.S. Department of Commerce.