Pub. 5 2014 Issue 1

spring 2014 23 West Virginia Banker 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 retirement. 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 consideration the impact of inflation on purchas- ing power after retirement. The table below illustrates how this percentage varies, based on pre-retirement income. Retirement income comes from three basic sources: Social Securi- ty, an employer-sponsored retirement plan, and personal savings. SOCIAL SECURITY’S ROLE Social Security was never intended to be the total source of re- tirement 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 adjust- ments 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—HOWMUCH AND FROMWHAT SOURCE? The next level of protection is generally provided by the employ- er’s plan or plans. The level of income replacement from em- ployer 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, depending 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, employee invest- ment savvy and length of time in the plan are all factors which must be taken into consideration in determining 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 environment, a financial institution 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 financial institution is twofold. In order to attract talented personnel, it must offer both ade- quate and attractive benefit plans in relation to its peers. While some turnover is unavoidable, financial institutions 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, financial institutions should consider a combination of retirement benefit plan options. MAXIMIZING YOUR INVESTMENT WITH THE RIGHT RETIREMENT PARTNER Retirement plans represent a substantial financial investment for employers. Maximizing that investment means working with a provider that’s best able to meet your organization’s business as well as benefit objectives. As plan sponsors continue to look more critically at their retirement providers, choosing the partners and products that allow sponsors to best achieve plan objectives requires in-depth analysis to ensure a “best” fit not only for orga- nizational goals but also the “best” interests of participants. 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 specialization/niche capabilities? Ask about the level of experience their teams have— their account loads and turnover. Also remember to ask if there is a formal monitoring process in place for service quality standards. COST TRANSPARENCY With retirement plan investing, it’s not what you make, but what you keep. Apart from fees charged for administration of the plan itself, there are fees that may be charged in connection with plan investments. Sales charges are basically transaction costs for the buying and selling of shares. These charges may be paid when you invest in a fund (known as a front-end load) or when you sell shares (known as a back-end load, deferred sales charge or redemption fee). A front-end load is deducted up front and, therefore, reduces the amount of your initial investment. A back-end load is determined by how long you keep your investment. There are various types of back-end loads, including some which decrease and eventually disappear over time. A back-end load is paid when the shares are sold (i.e., if you decide to sell a fund share when a back-end load is in effect, you will be charged the load). These fees are typically charged to offset commissions paid to brokers. Annual Pay Before Retirement Replacement Ratio $15,000 82% 20,000 76% 30,000 72% 50,000 72% 70,000 75% 90,000 83%  Designing the Right Retirement Plan for Your Organization — continued on page 24