Quote of the Week: “Do, or do not…

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…There is no try.” – George Lucas

<en.wikipedia.org

<en.wikipedia.org>

For this week’s quote we can thank George Lucas, an American film director, screenwriter, and producer perhaps best known for the creation of the Star Wars film franchise. It’s timely for me as a reminder that – even when we don’t completely have our footing – most of the time the best way to accomplish our goals is to simply roll our sleeves up, ask questions, think critically, and keep pushing to address a challenge until we get it done.

^This is not to say that there will not be times when we are out of our depth, but often the difference between success and failure isn’t determined by our knowledge and skills, but instead by the ability to demonstrate tenacity in the face of difficult to solve problems. But unfortunately, far too often people give up on tackling perfectly solvable challenges because they overestimate the steepness of a learning curve and/or their capacity to quickly develop a competency.

The past few weeks have been pretty hectic at times for me: This is because, frankly, the sheer density of information I’ve been inundated with in my new role has been a bit daunting. But by simply digging in and absorbing everything I can, a surprisingly large number of mountains that initially started out as overwhelming now seem perfectly climbable.

…So with that said, as we get started this week let’s look to take the words ‘If’ and ‘Try’ out of our vocabulary, and replace them with ‘When’ and ‘Will’: Let’s have the gall to have wildly unrealistic expectations, and the discipline to keep pushing for them when the going gets tough. In the process, I think that we’ll learn new things about ourselves and break through previously unassailable plateaus.

…Or maybe I have this wrong. As always, please share your thoughts in the comments section below.

Happy Monday,

Rory

Infographic Thursday: The Evolution in Career Management

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…Taking a break from benefits/rewards today to share the below infographic highlighting the differences between career progression in the past and career progression today. Do you agree with the assessment? As always, if you like what you see then follow Right Management on Twitter here. And as always, please share your thoughts in the comments section below.

Fullfilling-Careers-Infographic

Best,

Rory

Most Expensive Cities For Expatriates

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<www.businessinsider.com

<www.businessinsider.com>

Check out the below video from Mercer, which highlights the most expensive expatriate cities in the world. The survey includes 200+ cities across five continents, comparing costs of various items in each location, including housing, transportation, food, clothing, household goods, and entertainment.

Best,

Rory

A Few Thoughts on Utilizing Lump Sum Windows as a Pension Risk Management Strategy

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<www.linkedin.com

<www.linkedin.com>

…So this evening I read another great white paper from Aon Hewitt on retiree lump sum windows. You can read the full piece here, but in summary for those unfamiliar with the concept; the utilization of lump sum windows is a pension management strategy wherein a company de-risks its pension by offering lump-sum buyouts to retirees currently receiving annuities (and/or terminated vested employees that will be eligible for an annuity in the future). The strategy can make sense for employers because it allows them to reduce long-term liabilities, while it can add value for employees by giving them greater flexibility in how they manage earnings in retirement.

^The IRS actually recently released guidance effectively eliminating the ability for defined benefit plan sponsors to offer lump sum cash-outs to retirees, so companies no longer have the ability to offer retiree lump-sum windows. Conversely, windows for ‘terminated vested’ participants is still allowed, which means that the lump sum is still an option that can be offered by companies to former (pension qualified) employees that haven’t started drawing their benefits yet.

…The chief argument against the lump sump window offering (and part of the reason for the IRS ruling, I think) is that not all retirees have the financial literacy to appreciate the risks of taking a lump sum in lieu of an annuity. Mismanagement of the funds in retirement could result in a retiree outliving the benefit, making the option mainly attractive to retirees that are either (i) savvy investors with other nest eggs in addition to their pensions or (ii) those likely to have health conditions which make it likely they will have lower than average life 1. 1. Morbid, I know. expectancies. 1

^Put another way, taking a lump sum offering is something that can make sense for a retiree, but for the un-initiated it can be a big mistake with long-term financial consequences. In the Hewitt study above, the average election rate for employees offered the lump sum in 2014 was 58%. I am sure it was a good decision for some of that 58% to utilize the lump sum… but there was also no doubt a contingent of this population that spent the money on a new boat or something instead (just 55% of the lump sum participants in the Aon study rolled the funds directly into a tax qualified account – accounting for about 70% of the total dollars).

…With all that said, the challenge that many retirees electing to take lump sums faced (and will continue to face in the case of terminated-vested parties) is one that most retirees will have to confront going forward. With annuity based plans going away, the new normal is that everyone is going to need to start becoming savvier from an investment standpoint; because the days of employer paternalism are fast coming to an end, if they are not already over. With cash balance pension plans, 401(k)s, and personal savings most likely to make up the majority of future retiree earnings, future retirees that aren’t financially literate are going to fast burn through their savings (and there won’t be any annuities for them to fall back on).

^The question is where the employer falls in this picture: Starting from the place that the retirement paradigm has changed, I think that while it is fair to expect employees to have much greater agency in managing their retirement funds… it is also fair to expect employers to provide their employees with the tools to make educated decisions. This means more (free) resources to educate the workforce on just how much they need to save in retirement, and different strategies they can partake in to manage their resources as retirees.

…I went on a bit of a tangent here  – I know this was supposed to be about lump sums – but I think they’re part of a bigger picture that is the modern retirement landscape. In this new world, employees need to manage their finances in a way that post-world war generations were never asked to. Employers and employees alike are going to have to navigate this process together, and I’m excited to see exactly how they will.

As always, please share your thoughts in the comments section below.

Best,

Rory

A Few Thoughts on 401(k) Employer Matches

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<http://lifehacker.com

<lifehacker.com>

…Okay, so you may recall that last week I wrote a post about how employers could give employees a huge leg up on retirement savings by tweaking their plan rules to allow them to put after-tax monies into their 401(k). The utility of making this plan change would be that said employees could then (either at retirement, discharge, or via in-service distributions if allowed) roll these funds into a Roth-IRA and protect a huge chunk of their earnings from taxation at retirement. That said, the problem with leveraging this strategy is two-fold:

  1. Only HCEs are generally going to be able to take advantage of this
  2. The number of companies that can even leverage this option is low, because even employers with safe-harbor 401(k) plans are subject to ACP discrimination testing under 1.401(m)-3(j)(6) on after-tax contributions. So adding an after-tax option and passing the ACP testing is just not going to be possible for many (most?) employers

^In summary, the after-tax 401(k) isn’t really a viable tool for most companies to help their employees get more money into their 401(k). Because while 401(k) savings continue to climb, most employees aren’t currently even maxing their individual contributions.

…And yet with annuity-based pension plans going the way of the dinosaur, the 401(k) needs to take up a much larger portion of the retirement pie for workers in the U.S. than it currently does. This is because personal savings rates beyond 401(k) are very low for most U.S. workers, and social security is only funded through 2034  – with most Gen-Xers and Millennials expecting to never see any of the benefit at all.

^To be sure, despite perceptions to the contrary social security is likely to remain a bedrock of employee’s retirement income well beyond 2034, and growing life expectancies also make working into one’s late 60s and even 70s a viable way to put more money away for retirement. But following the 4% rule, the 12% of income that savers are on average socking away will be nowhere near enough to sustain them in retirement when coupled with social security benefits and (on average) relatively paltry personal savings.

…All of this points to a reality that (I think) employers are going to need to start becoming more aggressive with the matches they provide to employees. Currently the average is around 3% match, and even the top 15% of plans are only offering 6% or so. I think a more aggressive 401(k) match is probably needed here to position workers for a retirement as comfortable of that of their parents, yes? People just aren’t putting away enough money today…

That said, what 401(k) strategies are you seeing out internally or out in the broader marketplace? Obviously on the employee side automatic enrollment is a great way to get employees to sock more away (and at this point I think table-stakes if you really want to encourage employees to take advantage of the employer match), but on the employer side I am sure there must also be some companies doing innovative things to get more money into the pot at a cost they can live with. If you’re seeing or doing something special here, I’d love to hear from you in the comments section below!

Best,

Rory

The Increased Prevalence of DC Pension Plans is Going to Change the Way We Retire. How to Prepare?

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<www.forbes.com-

<www.forbes.com>

…Okay, so this evening I was reading a white paper from Aon Hewitt (you can find it here) that states the following:

One of the key findings from this research is that there appears to be a welcome sense of realism among employees about their retirement prospects. Nearly half of the respondents  expect their pension to be between 21% and 50% of their salary; the same proportion expect to retire between the ages of 66 and 70; and nearly one in ten don’t expect to be able to retire until they reach their 70s.

and:

This realism about retirement prospects also extends to the way in which DC members are planning to approach retirement. Only just under half of the sample expected to be
able to adopt the traditional approach to retirement, that is, work full time and then retire fully from all paid employment. Just over 40% of our sample expect to ease into retirement by working part-time before they retire, while nearly 5% expected not to retire at all!

^This is heady stuff. The broad-based shift away from traditional, annuity-based pension plans has made the idea of a straight shift from full-time employment to retirement less than even a pipe dream for nearly half of the U.S. workforce!

AH correctly points out that most employers are not ready to accommodate a paradigm in which 40+ percent of its workforce shifts from full to part-time, but when employers do catch up (most likely as the shift occurs) it’s going to create a compelling opportunity to skill up junior members of the workforce! I say this because currently knowledge management and transfer is perhaps one of the biggest gaps facing employers the world over. It’s an all-too-common situation: Valuable contributors leave their teams via all manner of attrition, and the remaining workforce often either doesn’t have the ability to fill the gaps at all, or else fills them sub-optimally.

^A shift towards phased retirement will get rid of a lot of these knowledge transfer issues, though. Obviously voluntary turnover from early and mid-career professionals continues to be a big challenge – one perhaps expounded upon by the portability of DC pension plans removing the pension as a retention hook for employers looking to preserve valuable human capital. But imagine a world in which a workforce’s most skilled labor gradually hands of responsibilities to the younger generation as opposed to leaving (often times massive) gaps when they retire.

^I think with this we’ll see a world in which more and more employers take advantage of the fact that the Fair Labor Standards Act (FLSA) does not differentiate between full and part-time employees or require that employees work a specific number of hours in order to be classified as exempt. Employers will come up with flexible working arrangements that allow high skilled, experienced workers to transition out of their roles as their financial circumstances allow. And to this point, the implications for compensation are immense. Putting together a total comp package that recognizes the reduced role an employee is in while at the same time allowing them to transition to retirement in a way that makes sense will be a challenge. And gradually raising a junior employee’s total rewards package over a progressive period of time as they take on more and more of a senior employee’s job duties will require a re-thinking of the current pay and promotion cycle prevalent at the majority of companies throughout the U.S.

…Just a Friday evening thought stream. As always, please share your thoughts in the comments section below.

Best,

Rory

Infographic Thursday: Workforce Stress

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Check out the below great infographic from Towers Watson sharing some causal factors behind workforce stress (employees and employers differ on the top causes), and the adverse impacts it can have on employee health and wellness. As always, if you like this infographic follow the author on Twitter here: TW_SatW-Infographic-Web600px-NA-2013-29407-v8-final.indd

Best,

Rory

The After-Tax 401(k) – A Super Saver’s Dream?

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<http://www.moneycrashers.com

<www.moneycrashers.com>

…So a few days ago I came across a Forbes article detailing a fascinating new after-tax 401(k) rollover rule. You can read the Forbes article (by Ashlea Ebeling) here, and also IRS guidance on the new rule here… but in summary the new rule allows high-earning super savers to potentially contribute up to $53,000 per year in earnings to a Roth-IRA account by taking advantage of employer 401(k) plans that allow for employee after-tax 401(k) contributions (beyond the $18,000 pre-tax 401/roth 401k limit) and allow in-service distributions.

^The overwhelming majority of employer plans do not allow after-tax 401(k) contributions – as far as I can tell this is because allowing such contributions would make it harder for an employer to pass its non-discrimination test, which states that the average contributions of highly compensated employees – defined as those earning more than $120k in 2015 – cannot exceed the average contributions of employees making less than this amount by greater than 2%. Some employers have workforce demographics that make this less of a potential issue than others, however (such as those made up of only HCEs or that have safe harbor plans), making such a plan option viable.

…Ultimately, even a high earner that had access to such a plan option would be well served to max out their $18,000 pre-tax 401/Roth(k) contributions and $5,500 traditional/Roth IRA contributions before taking advantage of the new IRS rule; this is because the former options all enjoy intrinsic tax relief, while after-tax 401(k) contributions need to be rolled over into an IRA via an in-service distribution (or at retirement) before a contributor can enjoy the same benefits. With that said, I think this is a really cool perk that a Company with the right workforce makeup could make available to attract top talent since it protects earnings from the capital gains taxes they would be subject to if invested in a non-IRA account.

Thoughts? As always, please share in the comments section below.

Best,

Rory

P.S. Someone just told me that this is also known as a Mega Backdoor Roth IRA, and another great blog post on it can be found here.

Quote of the Week: “The possible solutions to a given problem emerge as the…

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…leaves of a tree, each node representing a point of deliberation and decision.” – Niklaus Wirth

<Wikipedia.org

<Wikipedia.org>

For this week’s quote we can thank Niklaus Emil Wirth, a Swiss computer scientist best known for designing several programming languages (perhaps most notably Pascal). As I get started in a new role this week, it’s a timely reminder for me that some things require careful consideration and deliberation… and can only come in their time.

^As someone used to brute forcing solutions to questions without easy answers, this reality makes me a little crazy, but to really get my head around my new role it has quickly become apparent to me that I can only develop the technical skill set I require by taking my time and methodically absorbing the information I need to succeed. This does not mean I should not have a sense of urgency… but it does mean I need spend significant amounts of time in both the focused and diffuse modes of thought.

So as we get started this week, let’s remember that Rome was not built in a day, and that yhe sweetest fruit takes time to harvest. Let’s work hard, but also have a sense of patience.

If you succeed in doing this, tell me how.

Happy Monday,

Rory

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