"When we started the program three years ago, I think I had 4 plans. Today, I manage over 55 different plans and will look to add probably 30 more plans this year."
~ K. Gray, 401k Coach® Member

What Can Advisors Do to Ensure Participants a Paycheck for Life®?

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It’s official: baby boomers arebeginning to retire. For this reason, advisors may see (or have already seen)an increase in the number of participants retiring. Those on the verge ofretirement have accumulated wealth their entire working lives and have createdtheir own Paycheck Manufacturing Companies from their 401(k). However, is thisenough to guarantee them a Paychecks for Life®? There are several steps advisorscan take to help ensure that those thinking about retirement or the newlyretired won’t run out of money during their “desirement” years – the time thatthey spend in retirement.

Before Retirement
As Social Security’s demise looms on the horizon, an increasing amount ofAmericans worry if their savings will be enough. The 401(k) plan has come to beone of the greatest vehicles for providing an adequate retirement. However,many workers (according to some estimates 40 percent) do not enroll in their companies’401(k) plans, and if they do, they probably are not saving enough. There areseveral steps you can take as an advisor to help participants to begin savingearly and often, ensuring themselves Paychecks for Life®.

Step One: The 401(k) on Auto-Pilot
Many studies have shown that automatic features, including auto-enrollment,auto-placement, auto-escalation and auto-rebalancing, drastically improveparticipants chances of having successful retirements. Although participants cannotalways control the automatic features in their plans, the sponsor can. Youshould talk with plan sponsors about restructuring plans to include automaticfeatures, which offer them benefits, such as increased enrollment and fiduciaryprotection, as well.

Step Two: Other People’s Money
Participants are the masters of their own destinies, and you can teach them howto exploit other people’s money in their 401(k) plans. The first investors intheir 401(k) Paycheck Manufacturing Company (besides the participantsthemselves) are their employers. If their company has a contribution matchingprogram, make sure that participants use it. If they do not contribute at least the full matching percentage,they are missing out on free money. Some participants will only contribute twoor three percent of their salaries to their 401(k)s, but if their employer isoffering a five percent match, they should contribute at least that much to start.

The second investor in theirPaycheck Manufacturing Company is Uncle Sam. Although most people consider himto be a “taker” more than a “giver,” Uncle Sam has provided 401(k) participantswith a great opportunity. The contributions made to 401(k) plans are made withpre-tax dollars, and this allows participants’ assets to grow more quickly thanif they had contributed in after-tax dollars. If your participants are in the25 percent tax bracket, for every $100 they contribute, they are not taxed the$25 they would have been if they had not invested that money in their 401(k)s.They are already guaranteed a 33 percent return on their money, just bycontributing to their 401(k)s.

Approaching Retirement
In addition to the steps made well before retirement, there are severalother actions you can take when participants are thinking of retiring.

Step One: Assets vs. Liabilities
Dan is age 65. He put money into his 401(k) for over 40 years, and now he’sready to enjoy the fruits of his labor. Dan has managed to put away aconsiderable sum of money, but will it be enough to cover his liabilities? Manyadvisors simply focus on the assets that participants were able to accumulate,but some are beginning to compare this amount to liabilities. If Dan has alarge amount of debt (if he hasn’t paid off his mortgage or his credit cards,for example), his retirement plan assets might not be enough to provide himwith a Paycheck for Life.

The first step in determining ifparticipants are ready for retirement is to compare their assets with theirliabilities. This will provide an initial snapshot of their financial future. Ifit’s unclear whether participants will have enough money to enjoy theirretirement years, you can explore other options, such as working longer,increasing contributions to the maximum amount, etc. If you are uncertain aboutwhether assets will be depleted prior to the actuarial age of death, it’salways better to err on the safe side and offer them several alternatives toensure that they won’t run out of money, including buying an annuity, which isdiscussed in more detail below.

Step Two: Lifespan
Unfortunately, we can’t see the future. We don’t know if Dan will live to be 82or 122, but either way, it is our job as advisors to make sure he will neverhave to struggle financially. It is difficult to calculate lifespan, but we canestimate spending needs slightly better if we do. Depending on spending habits,Dan needs to replace 70 to 90 percent of his annual income.

We can try to estimate Dan’slifespan based on his parents, but there is still some risk involved sincethere are many factors that we may not know. Both of his parents may havesmoked heavily from a young age, but Dan may never have touched cigarettes. Danmay be overweight whereas his parents exercised regularly. The list is endless.The best thing we can do is overestimate his needs rather than leaving himwithout money. There are on-line calculators available that estimate longevitybased on health and a number of other factors.

Step Three: Annuities
Annuities are an increasingly popular investment choice since they provideguaranteed income, no matter what. Annuities protect retirees from a variety ofrisks, including outliving assets, but they also protect against investmentsdeclining in value and against inflation. Many participants do not consider lifetimeincome options because they are unfamiliar with this these kinds ofinvestments. You should talk to participants and educate them about lifetimeincome options, including annuities.

Some plan provider may offer anannuity option within the 401(k). Although these options are typically called“lifetime income solutions,” they behave very similarly to annuities, whichparticipants are often more familiar with. To use this option, participantsmust first purchase a “rider,” a contract for additional insurance, which caninsure all of or only a portion of the participants’ assets. These types ofannuities may not be for everyone since there are fees involved that reduce theportion of investable money within 401(k)s. Since not all providers offerannuities options within 401(k) plans, portability is another issue.“Traditional” annuities, outside of 401(k) plans, do not have these drawbacksand can be a great asset if longevity or inflation are major concerns forparticipants’ assets.

Retirees may not want to buyannuities as soon as they retire, but it is helpful to set aside a sum of moneyfor future purchase. This keeps their options open if they are ever in need ofalternative sources of income.

As advisors, we can take stepsand make recommendations to participants or those nearing retirement. Byhelping participants to utilize the resources at their disposal, we can ensure thatparticipants have a Paychecks for Life®.

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