Pub. 1 2010 Issue 1

spring 2010 11 Q Retirement Plans — continued on page 13 are not exclusive. The successful benefits program will reflect a blend of both philosophies. The Objective Approach The objective approach involves examining the level of income needed in order to retire comfortably. We use re- placement ratios as a tool in determining how much income a retirement program should provide when viewing these programs from an objective perspective. A replacement ratio is the percentage of gross pay prior to retirement that one needs after retirement to maintain the pre-retirement standard of living. It takes into consideration the fact that the post- retirement standard of living will reflect lower taxes and other fixed costs. Experts recommend that employees retiring in the next few years will need between 70% and 90% of their pre-retirement income to maintain a similar standard of living in retire- ment. These factors take into consideration the fact that post-retirement standards of living reflect lower taxes and other fixed costs. However, they do not take into consid- eration the impact of inflation on purchasing power after retirement. The table below illustrates how this percentage varies, based on pre-retirement income. Annual Pay Before Retirement Replacement Ratio $15,000 20,000 30,000 50,000 70,000 90,000 82% 76% 72% 72% 75% 83% Retirement income comes from three basic sources: Social Se- curity, an employer-sponsored retirement plan, and personal savings. Social Security’s Role Social Security was never intended to be the total source of retirement income — but rather a safety net. The age to qualify for benefits will increase as younger employees will not be eligible to receive full benefits until age 70. Annual cost-of-living adjustments may be curtailed in the future as Congress struggles with budget deficits and the anticipated Social Security shortfall which will occur as the wave of baby boomers exhausts current reserves — by the year 2015. While an employee (married, non-working spouse) retiring at age 65, currently earning $20,000 can expect nearly 68% of final salary from Social Security (Primary plus spousal benefit), higher salaried employees have a gap of over 60% to meet the study’s recommended replacement goal. Employer-Sponsored Retirement Plans— How Much And FromWhat Source? The next level of protection is generally provided by the employer’s plan or plans. The level of income replacement from employer plans is dependent on variables including the employee’s salary, length of service, retirement age, and the employer’s plan type/formula/match etc. Defined benefit plans might be structured to provide from 30% to 40% of the total replacement income needed, depend- ing on the employer’s benefit and cost objectives. This type of plan usually provides an annuity at retirement. Defined contribution plans are a potential, but less certain source of the replacement ratio mix. Plan structure, em- ployee investment savvy and length of time in the plan are all factors which must be taken into consideration in determin- ing how much income the plan will provide. Typically, these plans provide between 10% to 30% of replacement income. Unfortunately, studies show that more than 30% of lump sum distributions from these types of plans are spent well before retirement. The competitive approach In order to remain competitive in today’s business environ- ment, a community bank must also analyze the level of benefits it provides in relation to its peer group. The basis for providing a competitive benefit program for a commu- nity bank is twofold. In order to attract talented personnel, it must offer both adequate and attractive benefit plans in relation to its peers. While some turnover is unavoidable, community banks that provide competitive benefit plans will generally experience lower turnover among middle and upper management positions within their institutions. While the cost of providing such a benefit program can be high, the cost associated with turnover or failure to attract and hire the professionals you need to run your business can be substantial. In order to retain middle and upper level managers and offset turnover in lower management positions, community banks can consider a number of benefit plan options. What to Look For In A Retirement Provider Reputation, history and stability Providers should have a demonstrated experience in the retire- ment plan industry, a solid track record and reputation. Are retirement plans their only business? How long have they been in the business? What is their client retention rate? Do they have experience administering your unique plan features, or with similar workforce demographics or industry specializa- tion/niche capabilities? Ask about the level of experience their teams have—their account loads and turnover. Also remem- ber to ask if there is a formal monitoring process in place for service quality standards.