Post-Retirement Money Management
"We noticed that when people retired, many of them were leaving the plan," says Tony Cost, vice president of HR for the Woodland Hills, California-based container manufacturer. "Twenty percent of people leaving the plan were taking it out in cash."
Silgan is just one of the companies starting to talk about helping employees manage their savings after they retire. As more baby boomers approach retirement, this is becoming a more pressing issue, Cost says. The average age at Silgan is 49.
The Pension Protection Act, which became law last year, permits plan sponsors to automatically enroll employees in certain investment options, like lifecycle funds, which reallocate funds based on the age of the employee.
Now employers want to make sure that all of the money and time they have spent to help employees save for retirement isn’t in vain, says Eric Levy, director of business development with Mercer HR Services.
"Plan sponsors spend hours enhancing their plans and analyzing the funds in their plans, but what they don’t realize is that, unfortunately, a lot of their work is for nothing if when people retire, they just cash out," Levy says.
This need is even more pronounced for companies that have moved from offering a traditional defined-benefit plan to just a defined-contribution plan, including the 401(k), observers say.
"When those companies had a defined-benefit plan, they knew that their employees were going to get money for the rest of their lives," says Craig Copeland, senior research associate at Employee Benefit Research Institute. "But there is no automatic annuity option with D.C. plans."
Plan sponsors that discover how to get retirees to draw their money out of the 401(k) plans slowly also get cost savings, says Mathew Greenwald, president of Greenwald & Associates, a Washington-based research company that does surveys for the Employee Benefit Research Institute.
"The more money in the plan, the less the company pays in costs," he says.
But advising pre-retirees on what they need to do is not as easy as advising employees on how to save for retirement, says David Wray, president of the Profit Sharing/401(k) Council of America.
"It’s not an easy generic calculation like it is when you are in the accumulation phase, because each person in retirement has a unique set of needs," Wray says.
That’s why IBM has taken a personalized approach. In March, the Armonk, New York-based technology company unveiled MoneySmart, a financial advisory program that lets IBM’s 128,000 U.S. employees get access to personal financial planning either by phone, online or face to face.
The company has tapped two companies to provide the advisory service: Ayco for overall advice and Fidelity Investments for retirement planning, says Karen Salinaro, IBM executive vice president of compensation and benefits.
The service is particularly helpful for those who plan on retiring in the next few years. They can talk to an advisor about their income needs after they retire, Salinaro says.
"The advisor can talk to the employee about whether they are getting income from other sources and what the needs are and come up with a withdrawal rate that makes sense," she says. "It’s very personalized."
Offering an annuity
Some companies are discussing automatically deferring a portion of their employees’ 401(k) accounts into some type of annuity offering, Greenwald says. "Since automatic enrollment seems to be working, some companies are looking at auto deferral."
IBM, which closed its cash-balance plan in 2005 and will close its defined-benefit plan in 2008, offers retirees the ability to roll over their 401(k) savings into an annuity. Through an online service developed by Eden Prairie, Minnesota-based Hueler Cos., employees can plug in their information and receive price quotes for fixed annuities.
Adoption of the program has been low, since most IBM retirees today were in the company’s defined-benefit plan, Salinaro says. She notes that about one retiree per month signs up for the service.
"We didn’t expect there to be large take-up, but we do expect utilization to increase," she says.
Silgan also has discussed adding an annuity option to its 401(k), but executives have a lot of concerns about the complexities of these offerings, Cost says. "It seems that they are very hard to explain."
Silgan is talking to its 401(k) record keeper, Mercer, about offering advice over the phone to pre-retirees at the company. Silgan has some questions to work out before it makes a decision, Cost says.
"One question I have is, what would happen if the employee makes a decision to stay with the plan and then they don’t like their decision down the road?" he asks. "What fiduciary responsibility do we have?"
But Cost believes the potential advantages of reaching out to pre-retirees outweigh the disadvantages. "The more ways that we can help our employees, the greater our 401(k) plan is as a recruiting and retention tool."