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 and culture. On the show you’ll hear from industry professionals, will challenge you to think beyond the suit and tie while offering meaningful modern solutions to help you enhance your company’s growth. I’m your host, Mark Van Benschoten.
Over the last year we’ve been fortunate to have a couple retirement experts on the show who’ve shared a lot of great advice for employers and employees alike. Even though we are in a full-fledged retirement crisis, you, the listeners, have power to create a comfortable retirement for your employees and yourself. Paul McEwan, principal and director of benefit plan services, is here with us to explain some popular retirement plan solutions being used by business owners today. Welcome to unsuitable, Paul.
Paul: Thanks Mark, I have to tell you I’m a little disappointed that you selected my partner Steve Renner to be on this podcast before me, but I’m glad that …
Mark: Are you really offended?
Paul: That my people got with your people and got …
Mark: Figured it all out?
Paul: Yeah.
Mark: Steve was a great guest.
Paul: He was, he did a great job.
Mark: He set the bar high for your group, so big expectations.
Paul: I’m very nervous.
Mark: Are you?
Paul: He did set the bar high.
Mark: You don’t look nervous.
Paul: Well I appreciate that. I’m like a duck.
Mark: You’re like a duck?
Paul: I’m paddling like crazy under the water. Cool on the top.
Mark: Cool on the top, there you go. Well next time it rains we’ll call you up. Looking at your bio, you like to ride bikes and I think you and I have talked about your bike riding.
Paul: Absolutely. Actually I’m a little disappointed because one of my rules of thumb is that I don’t ride if it’s under 50 degrees and I ride very early in the morning. Typically we take off somewhere between 5 and 5:30. April’s been a really bad month, I was hoping we’d get out sooner than we have, but it looks like, looking at the forecast, looks like May is going to be earliest I can get out, but I am very passionate about bike riding.
Mark: Have you ridden at all this year? Calendar year 2016?
Paul: No I haven’t. I’ve been in the gym riding, but not out on the road which is where I like to be.
Mark: Do you ride in a group?
Paul: Typically I ride with friends, small group, but occasionally I’ll go by myself. On the weekends more often I’ll go by myself, just cover new roads.
Mark: Any near misses?
Paul: Yes, the one that I can always remember is heading out, it was dark of course and I can’t remember what I was wearing, but I was heading down, it was a two lane road, car coming towards me, lights on, it was dark. Turned out it was a truck and then I didn’t see the car behind the truck who pulled out who didn’t see me because he was behind the truck. Pulled out, passed the truck at the same time the truck was going by me so there are three of us wide on this two lane highway. That’s about the only time that I can remember that my life actually flashed before my eyes and …
Mark: Sounds scary.
Paul: I was a little nervous, yeah. Now I wear this bracelet with my ID because my wife is very worried about me every morning of course, but it’s a lot of fun and the nice thing is there really is a lot less traffic in the morning. It’s one of the reasons I like to bike at that time. We’re not talking much about retirement plans though, are we Mark?
Mark: No, I’m having fun though and that’s the important thing.
Paul: Okay.
Mark: What’s the rule, do you ride in the direction of traffic or do you ride into?
Paul: Direction of traffic.
Mark: Direction of traffic.
Paul: If you’re on a bike and walking, if you’re walking you’re obviously walking against the traffic, that’s the rule of thumb.
Mark: But if you’re on the bike you should be riding with traffic.
Paul: With the traffic, yup. But I’ve never really had a close call with somebody coming up behind me.
Mark: Do you have reflectors and all that stuff on?
Paul: Bright lights.
Mark: Bright lights.
Paul: Lit up like a Christmas tree.
Mark: That’s good.
Paul: Lots of those lights were bought by my wife. What would we do without our wives?
Mark: No comment. So we’re talking about retirement plans …
Paul: Yes.
Mark: And the retirement crisis, is there a crisis? I hope so because I said it.
Paul: Well I think in general, there’s consensus that we have a problem, I think there’s some disagreement maybe over the degree of the problem, so crisis, that might be overstating the problem a little bit but it depends on who you’re talking to. I think we definitely have some work to do as a country.
Mark: What’s the downside if we don’t do it? We just kind of meander through life and plod along?
Paul: Well I think we’ve been wrestling with this problem as a society for a long time, certainly since the 30’s when Social Security came into being. The downside is do any of us want to live in a society where half the population is living under a bridge or in the local park in a tent, and the answer to that is no. Or I guess, what did we do before social security? Parents lived with their kids and there was a much more, everybody was on the farm and taking care of each other, much more communal atmosphere. We’re all spread apart, society’s completely different. I think it’ll be really difficult to go backwards so I think the only alternative is to make sure that the bulk of us have something to live on in retirement, and there’s a multi-pronged effort there to make sure everybody’s okay.
Mark: I’m not an economist, I think I said that on the podcast before, and I’m still not one today, but I think that the burden to society and it sounds kind of harsh, by having to take care of somebody that has not taken care … there’s a burden there, there’s a cost to all of us for that.
Paul: There is.
Mark: Something that can be done prior to that, say we’re all going to contribute, we’re all going to save, we only have so many years of productivity in our life where we’re contributing and then at some point we’re kind of drawing on those assets.
Paul: Right.
Mark: That if we can all pitch in together and bring everybody up that I think overall would be less expensive for everybody.
Paul: Right, I think you’re identifying a couple of different themes there. Number 1, this country was founded and it’s very much part of our culture to be independent, so nobody wants a government to take care of everybody or to tell us what to do. But certainly we have design retirement plans; we can arrange our affairs such that people default into saving for retirement rather than having to make a conscious decision to do it. I think that’s probably, if you’re trying to look at maybe when this crisis started, it was probably back in the 80’s with the big switch from defined benefit plans which were paid for with employer dollars, employer contributions, to 401(k) plans. It was a subtle switch because that process was enabled through the internal revenue code and it was just a few companies that jumped on board initially but obviously the 401(k) plan it’s the primary means by which most Americans save for retirement now.
The subtle thing that happened there was that with a defined benefit plan, it was the company’s responsibility to save for your retirement and they promised a certain benefit for you in retirement. With a 401(k) plan it is now the employees responsibility, maybe the employer makes a contribution, maybe they don’t. The employee has no idea how much they’re going to need in retirement, there’s no guarantee with these 401(k) plans of any monthly benefit, so initially it was a very difficult process for employees to really grapple with. They didn’t know even if they were saving enough, how to invest their money properly for the long term. Market ups and downs would discourage them, maybe cause them to save less or save nothing at all. Lot of participants stopped participating after 2008 2009. Lot of employers stopped making contributions to the plan.
I think that switch from the defined benefit realm to the defined contribution realm is really what precipitated this. Really what’s been going on at the legislative level probably since 2006 is really trying to get the science of behavioral finance working in favor of getting people included in plans, so covered by plans, participating at a proper level, defaulting them into investments that make sense for the long term so they’re not just invested in the money market fund for example that’s returning next to nothing. We’re trying to put some mechanisms in place, and of course none of this is mandated. Still very much a voluntary system, but I think we are moving in the right direction and those are the conversations that we have, particularly with our more progressive clients that are really looking to take care of their employees. A lot of times it isn’t just from a materialistic stand point, but some of these decisions can really enhance the future financial well-being of the company themselves.
For example, nobody wants to have a situation where your employees can’t afford to retire. It has several problems. Number 1 if they don’t retire and they’re still performing well, it’s hard to get rid of them. We have laws that prevent you from firing old people for really no other reason. Older workers are obviously more experienced, they’re paid more than younger workers, older workers are typically going to have higher health care expenses. In a lot of ways we don’t want to gum up the system with people that can’t afford to retire, we want people to continue to work through their careers and ride off into the sunset so to speak.
Mark: And enjoy their retirement years.
Paul: Right, so there’s benefits to the company as well as benefits to the employees if you have an employer that’s really wrestling with or trying to beat this or conquer this retirement readiness crisis.
Mark: Seems to me that so much may be in a not just by allowing a reduction for a retirement plan contribution, you make it some incentive to get these companies to have plans, to make them auto enroll and things like that to really encourage the employer to have plans.
Paul: Of course the big incentive is the tax deduction and every once and a while you hear that deduction get threatened, but I don’t know that there’s really … I understand what you’re saying, I think it would be a tough thing to design and certainly when companies, when individuals like governments telling them what to do, that ends up being received negatively.
Mark: All throughout the other side is the level of compliance. Now you have a plan and you and I are well aware of all the compliance aspects.
Paul: Right.
Mark: Some people are saying “Well, I could get a deduction or I can’t but boy that cost of compliance is just astronomical” or “the risk to me and they might choose not to have a plan.”
Paul: Yeah, I think that’s more of an education issue. We do hear that quite a bit, and it’s a reason that a lot of employers give for not sponsoring plans, but there are a lot of alternatives on the retirement plan spectrum in terms of where a small employer might start in terms of sponsoring a plan with a SEP or a SIMPLE plan with very low administration costs. Just to kind of prime the pump so to speak and get the employees used to being covered by employer plans or contributing to a plan. Then as the company grows and becomes more profitable, you can move into more sophisticated types of what we call qualified retirement plans where there is some administrative cost but what we try to demonstrate and illustrate to our clients is the administrative cost of the plan itself, once you look at what you’re creating in terms of a retirement asset it’s outside of the plan that’s growing in a tax-deferred way is really nominal compared to the benefits of the plan itself and it really shouldn’t be a reason not to sponsor a retirement plan.
That really is the challenge I think as far as congress is concerned right now. The latest statistics that I’ve seen in terms of the number or percentage of employers that are actually sponsoring plans is about 53%. All the statistics show if an employee isn’t covered by a plan, he certainly isn’t saving by himself or on his own, taking the initiative because it’s just so much easier to save through a payroll deduction process because you never miss the money. We’ve got all kinds of vehicles out there for employees and individuals to save for retirement through IRA, traditional IRAs, [inaudible 00:13:26] IRAs, non-deductible IRAs, life insurance policies, there’s lots of ways you can save for retirement outside of 401(k) plans but all the research says that if you don’t make it really easy for people to save for retirement…
Mark: They’re not going to.
Paul: They’re not going to do it.
Mark: Another statistics I’ve heard you mention is that 68% of working people don’t participate in a plan.
Paul: Yeah, so where that comes from, so that’s clearly 53% of employers not sponsoring plans and then you throw on top of that the number of employees that have plans available to them and choose not to participate …
Mark: That’s just scary.
Paul: You end up with a very large percentage, yeah. What we’re trying to do is to come up with … all 401(k) plans you had to sit out a year before you were eligible so most companies have now wiped that away, we don’t want to penalize people for moving from one job to another by making them sit out of saving for retirement for a year. We’ve eliminated that. We’ve defaulted people into saving 3, it could be any percentage but most commonly 3 or 6% automatically. Now they obviously have the opportunity to change that or do nothing at all, but again the research suggests that if you default people in then they think that that’s what the recommended thing to do is and they’re not likely to change it.
Then of course the whole qualified default investment arrangement law that came into effect as a result of defaulting people into plans because if you’re going to default them into the plan and you don’t have any investment instructions from them, you’ve got to put them into something that’s in their best interest and so that’s where we got these target date funds and lifestyle funds, et cetera. Those really are over long terms, better places better allegations for folks in terms of long term investment income. Hopefully we’re getting more people. I think the statistics are moving in the right direction. Not quickly enough for me, hopefully and I think my concern, my biggest concern is that at some point the government is going to say “You know what? This is too big a problem for private industry to solve, we’re just going to come up with a national retirement plan” much like Social Security, kind of like Social Security of steroids if you will, but that’s my biggest concern, that it’s going to be taken away from the private sector and big brother knows best and they’re going to care of it.
Mark: Kind of scary.
Paul: Well, I mean I think there is some precedent for what we saw in health care. I’m glad that the private sector remained involved with health care but the idea that it became mandatory, that certainly rubs a lot of people the wrong way.
Mark: Like the first step?
Paul: Yeah, well, could be. We could end up with a one pair system, you’re right Mark.
Mark: That’s scary.
Paul: It is scary.
Mark: The saving for retirement is just daunting. Individuals graduating from college with student loan debt and you hear the terrible stories, $150,000 in student loan debt, make $38,000 a year, there’s just no way I can pay it back, now we’re telling them “Well you need to save money for retirement” and they’re like “Well, I need to eat too.” It doesn’t set up for a great result here.
Paul: No, and I think we need to do a better job educating our young people. I remember when I was a young accounting graduate from the Ohio State University, even though I was an accounting grad or accounting major, we didn’t spend a lot of time on personal finance issues. It was all debits and credits and accounting stuff. We were going through this transition from defined benefit plans, because I graduated in the 80’s and my parents didn’t know anything about 401(k)s, so they didn’t know how to advise me to save for retirement, it wasn’t something they really thought about and I think in the old days, I shouldn’t say the old days but, people thought of their house, building equity in their house as a retirement plan and I still hear that comment occasionally.
But I think we need to be much more proactive with our young folks, because they are coming out with more financial obligations when they graduate from college than they ever have before. That’s a whole separate topic in terms of the student loan crisis, but at Rea we’re taking a very proactive approach to that. Been working with our benefits folks as well as Annie Yoder who’s in charge of the Rea Academy, we’re going to put some videos together on a very similar podcast type format where we’re going to be really talking to our recent graduates, our interns about how do you balance all these competing interests for your cash? You’re not making a ton of money with your first job, you have to find a place to live, you’ve got to have a car, you’re probably going to have some student loans, and you should be saving for retirement, and you need to have an emergency fund. There’s all kinds of things that they should be thinking about, but we’re going to try and be much more proactive, so I think you’re right, it’s not easy.
Mark: We just had Don and Annie in talking, I don’t know if you had a chance to listen to their podcast yet, and she didn’t mention it but we’ll have to correct it next time.
Paul: Well I’m sorry she didn’t mention it. It’s important to me, Mark.
Mark: It is important to you. I think it should be important to all of us. I think there’s a … at some point as you’re saying, we just can’t put people out in terrible situations of living under bridges and we just can’t do that. These people need to be treated with dignity and hopefully you work hard, you have a career, you save, and you can enjoy the last few years of your life, travel, whatever, ride your bike.
Paul: Well whether people want to admit it or not, we’ve had a bit of socialism through the social security program and through Medicare and Medicaid for many many years, decades, and it was our first effort to correct that societal problem of people not having the resources to take care of themselves. I think we just need to continue moving in that direction, but I don’t ever want it to become a situation where it’s the government taking care of everybody.
Mark: I agree, in my limited life here the government hasn’t demonstrated they’re great at running a lot of things.
Paul: Well, that’s right. They are great at running a lot of things but there are a lot of things they’re not great at, and retirement plans are one of them and there’s a number of examples across the country, Illinois being one, where the state run retirement plans have not been run well and it’s certainly not a good example of … it doesn’t set a good precedent for what we might get and certainly there’s under-funding at the federal level with social security and there’s issues there that need to be dealt with. Yeah, I don’t have a high degree of comfort if the government is the solution.
Mark: Sure. There are, we’re getting short on time, but as an employer and they feel motivated, what should they be doing?
Paul: Well I think a great place to start is talking with their advisor if they’ve got a trusted advisor, whether it’s a CPA or an attorney or an investment advisor, but there are, like I mentioned before, there are retirement programs that they can put in place that are very low cost. The one drawback with the very low cost plans is that there is some compliance and typically the compliance falls on the employer, there’s no cost but there are things that they need to do. Occasionally if they’re not working with somebody who’s reputable and looking out for them, these plans can get out of compliance. Of course we’re here to help fix that, but that’s the place to start. It’s with these SIMPLE plans, whether it’s a SIMPLE IRA plan or SEP.
Mark: That’s the name of it?
Paul: Or even a salary deduction IRA, yeah that’s the name of it.
Mark: Right, it’s not simple as in not complicated, SIMPLE as …
Paul: Right so they’re IRA based plans so you’re basically just opening up IRAs for your folks and you’re allowing them to defer through salary reduction, you’re contributing these salary referrals into these IRAs, and you’re making, typically, a 3% match in a simple and that’s the way to start. You can go from there to more sophisticated 401(k) type plans, but most of our clients start …
Mark: That route?
Paul: Start simple, yeah.
Mark: Before we wrap up Paul, there’s a question that we ask ever guest. If you could have one super power, what would it be?
Paul: I know this is the one question that you ask every guest so I’ve given it some thought, and my thinking is that I’ve always been a person that appreciated brains over brawn, so some sort of, and there are a lot movies with this theme, but some sort of pill or super power that you can take to make yourself super intelligent I think would be my super power, if I could have unusually high intelligence.
Mark: I think you have that. You walk in the room and I think “Well there’s the smartest guy in the room right there.”
Paul: You’re very kind, Mark.
Mark: I thought you had that already.
Paul: I think I could be smarter.
Mark: I like you in the room …
Paul: But I appreciate your kindness.
Mark: When you walk in, oh there’s some intelligence in the room now. Well that’s our show for today, thanks for joining us today Paul. I’m sure listeners have found this discussion to be just as informative as I have. To learn more about your retirement plan options visit k2v78j.dektinary.com/podcast and of course don’t forget to subscribe to unsuitable on iTunes or SoundCloud. While you’re there, consider rating this show or leaving a comment. Until next time, I’m Mark Van Benschoten encouraging you to loosen up your tie and think outside the box.
