By Sekou “Koe” Murphy
Financial security is a top concern for most of us, and it creates a lot of stress the older we get. Making matters worse, some employees are the main breadwinners in their households and may live in multi-generational homes, where financial security becomes even more critical.
Years ago, the attractive retirement benefit was a defined benefit plan. This kind of plan provided for a lifetime of financial payments in retirement to employees. The risk was on the employer to manage investments so that it could provide a defined amount of these payments.
But some employers ran into trouble with managing the investments so that there wasn’t enough to make these payments. To note, many didn’t do this intentionally. In some cases, miscues in assumptions like life expectancy and interest rates caused the plans to be underfunded (for example, unable to fully meet the required retirement payments).
To alleviate this, defined contribution plans became more popular in the mid-1980s. This shifted the risk to employees, where retirement was based on the amount contributed and the performance of the investment funds chosen.
One of the things that employers should do for their staff is to periodically benchmark their plans to ensure that plan costs, investment performance and diversification, as well as plan services are reasonable. Lower costs directly contribute to higher returns. It means that investments don’t have to work as hard to overcome high fees in addition to providing a return on investment.
Better-performing investment choices allow for improved performance compared to lower-performing funds.
At NASW, we undertook this kind of analysis. It was exciting to know that we were lowering plan expenses by over $100,000 for employees every single year—and providing better quality funds. When evaluating investment firms, we also included diversity equity and inclusion as that was part of our mission, as well as value-added benefits such as free tools that staff may wish to use (such as will prep and modeling retirement outcomes). The firm’s experience with defined contribution plans, and their years of experience.
It was a long process, but we think the process resulted in something that will best meet our staff’s retirement needs and financial goals.
DISCLAIMER: Nothing in this post should be considered financial, tax, or legal advice and that employees/readers should consult their own financial, accounting, or legal advisors.
Sekou (Koe) Murphy, is NASW’s Chief Financial Officer and director of NASW’s Insurance Company, Inc. (NASWIC).