Your employer could improve your retirement planning simply by investing on your behalf and using its buying power to drive a better deal, according to a report by human resources consultancy Mercer with analytical help from the Society of Actuaries.
These analysts looked at three different approaches to creating retirement income and calculated how much difference employer-managed deals were likely to make in the outcomes.
Three ways employers can help
Help with systematic withdrawals. In this scenario, retired employees leave their money invested in their employer's 401(k) or other defined contribution plan. They withdraw a set amount each month, adjusted annually for inflation. The withdrawal amount is calculated to provide them with an income for life -- unless they live too long or the plan experiences unusually poor investment returns. Mercer says that employers can help insure against these negatives by controlling the investment cost. When the employer does the purchasing of the funds, the fees average 0.5 percent compared to an average of 1.5 percent when an employee does the purchasing. Actuaries figure the lower fees can extend the time a retiree's money lasts by two or three years. In addition, if the employee withdraws a fixed percentage at the beginning of each year, the money doesn’t run out. But holding cheaper funds could result in income that's 10 percent higher after 10 years and 21 percent higher after 20 years, according to the actuaries.
Negotiating for good deals on immediate annuities. In this case, a retiree uses the money in his 401(k) to buy an annuity than begins at retirement to pay him a monthly guaranteed income for the rest of his life. Mercer says employers can help by offering an annuity bidding service so retiring employees find the highest-paying annuities from among the most reputable insurance companies. Then, instead of the employee buying one annuity, if the employer bought annuities in bulk, the prices would likely fall further. The actuaries say competitive bidding alone will increase retirement income by 10 percent to 20 percent, while the reduced cost of buying in bulk will increase income by another 4 percent to 8 percent.
Annuities with guaranteed minimum withdrawal benefits. These annuities are sort of like immediate annuities on steroids. They give retirees the potential of increasing their retirement income if investment returns are good, but guarantee them a minimum monthly income for life even if returns are lousy. Some of them also allow access to part of the investment pot during retirement and the option of leaving unused money to heirs. The drawback to guaranteed minimum withdrawal benefit annuities is their expense. Mercer says an employer who does the purchasing on behalf of retirees and controls the fees can increase the initial retirement payment by 12.5 percent. If the employer continues to oversee the management of these super annuities, actuaries calculate that in 10 years, retirees will get 16 percent more retirement income, and in 20 years, they will have 19 percent more income compared to workers who didn't get employer help.
Keeping the employer in the picture sounds like a great deal for employees, but Mercer tells employers that there are advantages for them, too. It says that with the help of their employers, older workers feel more confident about retirement and are likely to happily leave the company, making room for younger workers.