As financial professionals, we know that “set it and forget it” is not an option for most of the things we do. One area where this certainly applies is with employer-sponsored retirement plans. Though it can be tempting for plan sponsors to “set it and forget it,” retirement plans must be regularly monitored in order to fulfill their fiduciary duty. Here are three things that your clients who sponsor defined benefit plans can do to improve them this year.
Reevaluate Your Risk
With the current bull market recently celebrating its tenth anniversary, most everyone agrees that the economy is in the late-cycle phase of this expansion. Volatility has picked up and the stock market gave investors quite a scare last October as the year’s gains were quickly wiped out. Coupled with rising interest rates, this has a lot of plan sponsors reconsidering the level of risk in their defined benefit plans.
Now is a good time to help your clients determine if the level of risk in their plan is appropriate. While the funding status of most plans has been steadily improving, the stock market has played an important role in that. The next market downturn could have detrimental effects on a plan with an inappropriate level of risk.
Increase Payout Options
Most defined benefit plans offer workers only two payment options upon retirement. They can either take their entire pension as a lump sum or have it paid out to them as an annuity over the rest of their lives.
The lump sum option is beneficial for those that want to pay down debt in preparation for retirement or that want to leave an estate to their heirs. The annuity option provides longevity protection as workers will not outlive their benefits. However, forcing plan participants to only choose one or the other is not always in their best interest.
One way your clients could improve their defined benefit plans this year is by adding more payout options. For example, providing participants with the option to take half of their pension as a lump sum and the other half as an annuity may serve their needs better than forcing them to choose between the two. That way, they could pay down debt, putting themselves in a solid financial position for retirement, and yet still have longevity protection in the form of an annuity.
Convert To A Cash Balance Plan
Another way to improve an existing defined benefit plan is to convert it to a cash balance plan. A cash balance plan is a hybrid pension plan that combines features of both defined benefit and defined contribution plans.
Because of the way benefits are expressed as an account value, they are much easier to understand for plan participants than regular defined benefit plans. This helps workers plan more effectively for retirement, as they have a better idea of the benefit they will be entitled to. Cash balance plans are also more portable than other defined benefit plans. If an employee leaves the company, the account value can easily be rolled into an IRA or 401(k) at the new employer.
The portability also helps plan sponsors because they don’t have to manage and guarantee the benefits for former employees once they are rolled out of the plan. They also help business owners in that they allow for high contributions for key employees and older workers and make it easier to control the cost of benefits for others.
How We Can Help
If you want to help your clients improve their retirement plans this year and don’t know where to start, we can help. We partner with financial advisors like yourself in order to help them provide the highest possible level of service to their clients. Together, we can assist your clients in optimizing the retirement plan that they sponsor to give both them and their employees a more solid financial future. Email us at FinancialFocus Retirement Plan Services today at info@ff401k.com for more information.
About Kenny Phan
Kenny Phan is a Managing Partner at FinancialFocus Retirement Plan Services. He works as a pension specialist who partners with financial professionals to design and implement pension plans. His area of expertise is customized defined benefit, defined contribution, and 401(k) plans. Serving financial advisors and businesses around the nation, he is supported by FinancialFocus Retirement Plan Services. Together, they provide comprehensive plan design consultation, administration, document installation, compliance testing, as well as IRS and DOL reporting for qualified retirement plans.