Which criteria tell the real story

If you gave your retirement plan a report card, what would it look like? Does it do the job of preparing your participants for retirement? And how do you benchmark your plan’s performance? Let’s take a closer look.

Defining criteria

First, a quick reality check: What criteria do you already use to benchmark your plan’s performance? Traditional measures such as fund investment performance relative to a peer group, the breadth of fund options, benchmarked fees, and participation rates and average deferral rates (including matching contributions) are critical. But they’re only the beginning of the story.

Add to that list helpful administrative features and functionality, including auto-enrollment and auto-escalation provisions, investment education, retirement planning, and forecasting tools. In general, the more, the better.

A sometimes overlooked plan metric is average account balance size. This matters for two reasons. First, it provides a first-pass look at whether participants are accumulating meaningful sums in their accounts. Naturally, you’ll need to weigh that number in light of the age of your workforce, and how long your plan has been in existence. Second, it affects recordkeeping fees — higher average account values generally translate into lower per-participant fees.

Knowing your plan asset growth rate is also helpful. Unless you have an older workforce and participants are retiring and rolling their fund balances into IRAs, look for a healthy overall asset growth rate, which incorporates both contribution rates and investment returns.

What’s a healthy rate? That’s a subjective assessment and you’ll need to examine it within the context of current financial markets. A plan whose assets shrank during the financial crisis a decade ago could hardly be blamed for that pattern. Overall, however, you might hope to see annual asset growth of at least 15%.

Keeping participants on track

Ultimately, however, the success of a retirement plan isn’t measured by these discrete elements, but by aggregating multiple data points and others to derive an “on track to retire” score. That is, how many of your plan participants have account values whose size and growth rate are sufficient to result in a realistic preretirement income replacement ratio, such as 85% or more?

It might not be possible to determine that number with precision. Such calculations at the participant level, sometimes performed by recordkeepers, involve sophisticated guesswork with respect to participants’ retirement ages and savings outside the retirement plan, as well as their income growth rates and the long-term rates of return on their investment accounts.

Communicating with participants

So, after you analyze how your participants are doing, what can you do with the data? The most important thing is communicating each employee’s “on track” status directly and urgently to him or her.

A study by Empower Retirement, a retirement plan recordkeeping company, found, perhaps not surprisingly, that many retirement savers begin to increase their deferral rates when told their on-track statuses, expressed as an income replacement percentage. This preparedness metric proved to be significantly more motivational than merely being reminded of their account balances and growth rate.

Once you’ve given your participants their individual “on-track” statuses, you can also point them to tools that can generate projections of the impact on their on-track statuses of adjustments to their deferral rates. A sophisticated modeling tool would also project different forecasts based on varying asset allocation mixes.

Now what?

It’s unrealistic to expect a comprehensive on-track analysis to reveal that all your plan participants pass the test with flying colors. What’s important is finding and adjusting the right levers to increase your plan’s performance each year. Also, while doing so, it’s still critical to keep your eye on the ball with respect to the full range of fiduciary duties attendant to sponsoring a retirement plan.

 

Sidebar:Retirement preparedness: A national perspective

A large survey published early this year by Fidelity Investments offers some perspective about participants’ retirement readiness. Here’s a recap of the 2017 “America’s Retirement Score” report based on the survey’s four preparedness groupings:

On target.About one-third (32%) of American households fall into this category. Being on target means being on track to cover more than 95% of projected expenses in retirement.

Good.This group, defined as heading toward a capacity to cover 81% to 95% of their estimated expenses in retirement, comprises 18% of working American households. They’ll likely be able to cover essential expenses, but not discretionary ones such as travel and entertainment.

Fair.Slightly more than one in five (22%) are projected to be able to cover 65% to 80% of their expenses. Unless they improve their statuses, they’ll need to make “modest” lifestyle adjustments in retirement.

Needs attention.At 28% of American households, this group is the second largest, behind the “on target” group. Projected to cover less than 65% of their expenses, these people will need to make “significant” downward lifestyle adjustments to cover their expenses.

By generation, the largest “on target” cohort is Baby Boomers, in part because greater numbers of them are covered by traditional defined benefit pensions. Their average score is an 86. Gen X and Millennials are essentially tied at 77 and 78 ratings, respectively, according to the report.

©2018 Covenant CPA

If you dream of spending your golden years in a tropical paradise, a culture-rich European city or another foreign locale, it’s important to understand the potential tax and estate planning implications. If you don’t, you could be hit with some unpleasant surprises.

Avoiding the pitfalls

If you’re a citizen of the United States, U.S. taxes will apply even after you move to another country. So if your estate is large, you might be subject to gift and estate taxes in your new country and in the United States (possibly including state taxes if you maintain a residence in a U.S. state). You also could be subject to estate taxes abroad even if your estate isn’t large enough to be subject to U.S. estate taxes. In some cases, you can claim a credit against U.S. taxes for taxes you pay to another country, but these credits aren’t always available.

One option for avoiding U.S. taxes is to relinquish your U.S. citizenship. But this strategy raises a host of legal and tax issues of its own, including potential liability for a one-time “expatriation tax.”

If you wish to purchase a home in a foreign country, you may discover that your ability to acquire property is restricted. Some countries, for example, prohibit foreigners from owning real estate that’s within a certain distance from the coast or even throughout the country. It may be possible to bypass these restrictions by using a corporation or trust to hold property, but this can create burdensome tax issues for U.S. citizens.

Finally, if you own real estate or other property in a foreign country, you may run up against unusual inheritance rules. In some countries, for example, your children have priority over your spouse, regardless of the terms of your will.

We’re here to help

If you’re considering a move overseas after you retire, discuss your plans with us before making a move. We can review your estate plan and make recommendations to help avoid tax pitfalls after you relocate. Call us at 205-345-9898 for more information.

© 2018 Covenant CPA