Retirement Investors: Connecting Math, Emotion and Choice

Mike Smoots HeadshotBy: Mike Smoots

Retirement plan sponsors face a challenge that is more complicated than it may appear in offering employees the opportunity to save at work. Employees need to retire. And employers need to provide this benefit in a cost efficient manner. Given the current legal environment, the stakes are high for understanding these challenges and reaching good answers.

Relative to employees saving in the plan: they are subject to the same pitfalls that challenge most investors, like lack of knowledge, poor decisions and regret. Employee education is critical in making this important benefit effective. Investor behavior, math and personalized goal planning are three topics that employers can share to drive improved choices and better results for savers.

As for the plan itself and its efficiency (or cost): unfortunately our financial system has created a maze that plan sponsors must navigate. The bright light needed for success in this regard is fee transparency, but ‘revenue sharing’ can make that difficult. Clarity on the true cost of the retirement plan requires identification of conflicts of interest and certainty as to how various parties are paid. Breaking cost into three distinct components: 1) investment expense, 2) administrative expense and 3) the cost of advice is a powerful way to measure actual retirement plan cost.

Over the past several years, the legal consequences of making a retirement plan available have increased in significance. Lawsuits against plan sponsors are common, and the Department of Labor has become more focused on retirement plans, in general. No matter what new regulations, if any, are finally implemented, a buzz word has been amplified in the retirement plan conversation: fiduciary. While it is important for fiduciaries to understand the applicable legal obligations, it is just as important to understand effective methods for retaining an outside advisor to provide advice, in an arena where conflicted advice can be common.

Presentation Objectives:

  • #1 Saving for Retirement. Help retirement plan sponsors and employees understand the common pitfalls that retirement plan savers encounter and how to overcome them. A) Learn why stock market fluctuations lead to poor investing decisions: 401k savers often buy high, sell low and stay out, when left on their own. B) Explain the math showing that how much saved and how long one saves far outweighs other factors in achieving a successful retirement. In particular, the power of compounding may be a surprise for many people less familiar with investing. C) Demonstrate a useful tool that helps people plan and commit, which may act as a foundation for good investment choices, against the volatile securities markets: Shlomo Benartzi’s Retirement Goal Planning System.
  • #2 Retirement Plan Cost Structures. Employers often have a difficult time understanding the retirement plan discussion, whether that concerns the jargon, proclaimed value or cost. Decoding revenue sharing practices is the best path toward finding transparency. This practice breaks retirement plan cost into three aspects: A) investment expense B) administrative expense and C) the cost of advice.
  • #3 Legal Environment. Summarize some of the recent retirement plan litigation against retirement plan sponsors, which generally concerns a claim for breach of fiduciary duty under Employee Retirement Income Security Act of 1974 (or “ERISA”), especially the U.S. Supreme Court’s decision in May 2015: Tibble v. Edison International. Cover the current status of proposed regulation and the industry impact from the recently nullified Fiduciary Rule (What was the Department of Labor trying to accomplish?), as this environment impacts those tasked with fiduciary oversight of retirement plans.

About the Speaker:
Mike Smoots works at Qualified Plan Advisors as an attorney with a focus on ERISA services. Previously, Mike was a Vice President with a national recordkeeper. He negotiated agreements with asset managers, reviewing investments for their total cost and revenue sharing—maximizing these payments for retirement plan sponsors. He also reviewed hundreds of retirement plans, ranging in size from $10 million to $20 billion, relative to investment selection, plan design and revenue sharing, as a member of the finance team. Mike graduated from Kansas State University with a bachelor’s degree and earned his juris doctor from the University of Kansas.

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