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For CFOs, getting employees to hit their retirement goals isn't part of their job description. At least nobody has made it a relevant goal for them. Until now.
Hugh O'Toole, president of Viability Advisory Group, is helping to reframe the conversation around retirement plan success. Retiring on time and protecting wealth is an extremely important mission for plan advisors. But O'Toole asserts that it's not just about participant outcomes—it's also about the future viability of employers sponsoring the plans. And that's something finance chiefs should be concerned about. There's a substantial financial cost to keeping aging employees who are working out of necessity on the books.
For their part, financial advisors can connect the dots. "We need to establish a new center point for advisors to have a dialogue with plan sponsors," O'Toole says. "You can do that by putting plan success in terms the CFO can understand and care about."
Doing the Math
First, retirement plan advisors must show them the numbers. That's what bean counters understand. For example, "What percentage of a plan's participants will retire at age 65?" Knowing the answer to this question helps employers arrive at an expected retirement age for plan participants, O'Toole says. Another key data point that yields insight is the marginal cost of employing, say, a 60-year old versus a 35-year old. At one firm O'Toole provided consulting services for, the cost was about $14,500 a year. That disparity is based on the fact that older employees earn higher wages and submit more health-insurance claims.
“Early retirement is generally a cost saver for companies while working past retirement age can be a liability.”
Drilling down, it's also valuable to know how many employees will retire before 65, and how many will retire after 65. Early retirement is generally a cost saver for companies while working past retirement age can be a liability. That liability stems from increased health-care costs, higher income, potential lost productivity in some cases, corporate matching and so on. In one case, employees retiring at 62 saved the company about $50,000 per employee, O'Toole says. On the flip side, when employees stayed with the firm until they were 70, the company incurred liabilities of $50,000 per employee, he says.
However, there's a caveat: Among the aging employee population, we have to distinguish between employees who choose to work and those who have to work out of concerns for their retirement readiness. People who make a decision to work because they like their job are often well worth the added cost.
A Different Set of Risks
Still, all this data amounts to being able to quantify the risk of defined contribution plans. The common misconception is that the switch from defined benefits to defined contribution meant that the risk burden was eliminated for plan sponsors. But the risk hasn't gone away—it's changed. The risk has moved from the quantifiable liability of paying the bulk of the retirement costs to the more nebulous unfunded liability of an aging workforce unable to retire.
Without question, behavioral finance has been an eye opener for the retirement industry as we seek to better understand the psychological obstacles retirement savers face—and the money mistakes that accompany them. That has also helped inform the glide path construction blueprint. These are good ideas backed up by science.
“The risk has moved from the quantifiable liability of paying the bulk of the retirement costs to the more nebulous unfunded liability of an aging workforce unable to retire.”
However, they're not always actionable for CFOs. For these folks, you need to mitigate the financial risk for the employer. When employees have good savings habits and employers deploy plan features that mitigate behavioral obstacles—auto enrollment and auto escalation—then those employees are more likely to retire on time. That readiness effectively lowers the average retirement age in the plan, which also lowers the cost of benefits for the company.
Further, studies have even shown that employees who have fewer financial distractions in their lives are more productive and more engaged. That's the kind of math the CFOs can get their heads around.
A Race to Zero
What's at stake for you as advisors? Your own livelihood. In a fee-based world, financial advisors offering the three F's—fees, fiduciary and fund selection—have been commoditized. As an advisor, your competition can undercut you by providing the same services for less money. "It's becoming a race to zero," says O'Toole, who founded his company to enhance employer viability by having employees protect their families and become financially well. "And if you can't make money, then you're out of business."
“As an advisor, your competition can undercut you by providing the same services for less money… It's becoming a race to zero.”
But you can stave off the price war by making the CFO your ally and advocate. Essentially, by making plan viability relevant to people who are in charge of the profitability of the firm, you're changing the conversation. You're creating a truly unique proposition. By quantifying a risk that has been previously unknown, you bring an element of certainty to the CFO, who can then assess how it impacts the firm's bottom line. What's more, removing liability for the plan sponsor is directly correlated with how advisors get paid. That will stop the margin compression advisors have experienced in recent years.
If you can get through to the CFO, then you've added a whole new dimension to your practice. And you'll have aligned your interests with the CFO, the plan participant and the plan sponsor.
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Glenn Dial is Head of Retirement Strategy in the US with Allianz Global Investors, which he joined in 2011. He has 23 years of defined contribution experience. Mr. Dial is a co-inventor of the method and system for evaluating target-date funds, and is also credited with developing the target-date fund category system known as “to vs. through.”
The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.
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