Is Your 401(k) a Savings Plan or a Retirement Plan?
Monday, February 24, 2020
Posted by: Abbey Kwiat
Thomas Kret, Senior Vice President - Investments, Institutional Consultant, UBS
Your organization's 401(k) plan is a big investment – of both money and time. So ask yourself, is your 401(k) designed to actually help prepare your employees for their eventual retirement?
Providing sufficient retirement income for your employees at a reasonable cost to your business requires careful attention to how your plan is designed. As an employer, there are steps you can take to address these challenges and help give your employees the knowledge to successfully transition into retirement, when the time comes.
While there are many effective approaches for employees to accumulate assets before retirement, once they begin to transition into retirement, the strategies that served them well may not prove as effective due to two risk factors; longevity risk and sequence of return risk.
Longevity Risk – the risk of underestimating life expectancy, leading to a miscalculation of how much growth you will require in your portfolio. With global life expectancy on the rise, investors may be exposed to greater longevity risk. To account for the added uncertainty of a longer retirement it's prudent to increase the assets set aside for retirement or to reevaluate viable spending amounts. To effectively plan for these longer horizons, investors need to be able to use investment strategies so they can incorporate appropriate projections of longevity into their financial plans.
Sequence of Return Risk – the risk that a portfolio experiences highly negative returns early in retirement while taking withdrawals. As a consequence of the drawdown, the reduced portfolio value results in a situation where the retiree's withdrawal rate is no longer viable, and puts the long-term health of the retirement plan in question. A multi-year liquidity strategy along with a balanced, well-diversified portfolio can help mitigate sequence of return risk.
To help employees who are nearing retirement to fully prepare for retirement, your education programs should raise the awareness of these risk factors. Additionally, your plan's design should incorporate investment solutions and strategies that mitigate these risks to make your 401(k) more than just a savings vehicle, but rather, a true retirement plan.
For over three decades, as a Senior Retirement Plan Consultant, I have focused on assisting employers and their retirement plan participants to accumulate assets for retirement. Call me today to discuss how my retirement educational services, combined with the strength of UBS, can help assist your employees to retire with dignity and in the lifestyle that they envision.
Thomas B. Kret, CRPS®, CIMA®
Senior Vice President – Investments
UBS Financial Services Inc.
303 East Main Street
Barrington, IL 60010