Employee benefits molded into retirement planning
Myra Knoesen, FAnews Journalist
According to National Treasury, only about 10% of South Africans save enough to maintain their pre-retirement level of consumption after they stop working.
While the South African government continues to try and find ways to encourage people to save, most notably with the launch of the tax-free saving accounts, Steven Nathan, Chief Executive of 10X Investments says it is just as important that employers make individual retirement planning an integral part of their employee benefits programme.
Overcoming the challenges
According to Nathan, it is always challenging to priortise the future ahead of the present, to defer gratification, to make short-term sacrifices in return for long-term rewards. “In this regard, low income earners – paying a lower marginal tax rate - are in an even more difficult position, as their contributions do not enjoy the same immediate tax shield as the contributions of high income earners,” he said.
“Individuals need to make the little money they have saved last for longer. This further burdens public finances and leaves many elderly people dependent on family for support. This in turn lowers the ability of these younger families to save for their own future.The sooner people start saving, the more of their final retirement pot is funded, not by contributions, but by the investment return earned on those contributions,” he continued.
Nathan said most clients cannot differentiate between products, because they do not know – and are not taught – the important performance metrics. “Retirement savers need (irrespective of what they want) simple, low cost solutions that protect them from their knowledge and behaviour gaps, resulting in a high chance of meeting their retirement goals, that are supported by reliable financial planning tools, hassle-free administration, clear reporting and easy access to information,” he said.
Simplifying complexities
The majority of retirement fund members do not consult financial advisers or brokers about retirement savings and investments. According to Nathan, this is due to bad experiences such asrecommending expensive, poor-performing products, non-disclosure on essential product terms or users becoming more aware of the long-term impact of recurring adviser fees on their savings outcome. Thus, retirement fund members choose to go direct or source online information.
However, 57% of retirement fund members actually do make use of financial advisers and brokers, he said.
Instead of offering multiple different products and alternatives,which are complex, there should be retirement fund transparency. Nathan said fund managers should focus on providing a simple, universal retirement solution that gives each investor a high chance of meeting the goal set in their retirement plan. “An effective product is risk-appropriate, distributed, administered and managed at a fair fee,” he said.
“Retirement in effect, should form part of a liability on the employee’s personal balance sheet, in the same ways as their home loan, for example. Like a home loan, the more and the sooner a client pays his or her installments, the more likely he or she will pay off this debt, and the less they will have to pay, in terms of total contributions,” continued Nathan.
A step in the right direction
Most employees, according to Nathan, will fund their retirement almost entirely from the plan provided by their employer. “Given this dependency, it is even more important that retirement fund trustees, in co-operation with employers, ensure that the retirement plan offers an optimal solution,” he said.
However, Nathan pointed out that there must be some middle ground. “Employers cannot assume financial responsibility for their employees’ retirement, but they can help them achieve a comfortable retirement.”
“Advisers play a critical role in educating clients, and helping them determine their retirement goal, crafting a saving and investment strategy that has a high chance of meeting this goal, tracking progress annually and ensuring the client stays true to this strategy even if appears to be sub-optimal in the short-term (e.g. during periods of market volatility),” said Nathan.
“It is a question of choosing the investment style that has the highest probable return over the investment time horizon. And that is a well-executed, low cost passive investment strategy,” he said.
A formal retirement plan is a great way to encourage employees to start saving, according to Nathan. “The goal can be quantified in the context of each employee’s current life-style (income). Once the goal is known, it is possible to develop a savings and investment strategy that has a high probability of meeting this goal. The critical factors here are the savings term, the contribution rate and the real (after-inflation) investor return,” he said.
“Once such a plan is formulated and implemented, every contribution then becomes a stepping stone towards financial independence, and employees will be more motivated to take these steps, and track their progress,” he continued.
Nathan said that a formal retirement planning programme is an invaluable employee benefit, which will empower staff to make informed financial decisions and can be used as a tool to achieve financial independence. “The sooner that employees follow a sensible and realistic retirement plan, the better their outlook for retirement will be,” concluded Nathan.
Editor’s Thoughts:
The importance of retirement investing has often been highlighted. This shows the value of proper advice and the need for advisers to go into great detail regarding all implications relating to tax changes on retirement and healthcare funds. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts myra@fanews.co.za.
