Why retirement planning should form part of employee benefit policies

Steven Nathan, CEO of 10X Investments.

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 on 1 March 2015, it is just as important that employers make individual retirement planning an integral part of their employee benefits programme.

This is according to Steven Nathan, CEO of 10X Investments, who says most employees 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.”

However, this alone will not suffice. “We have moved from defined benefit funds, where the employer assumed all the responsibility for their employees’ pension, to defined contribution funds, which place this burden almost entirely on the employee,” he adds.

Nathan points out that there must be some middle ground. “Employers cannot assume financial responsibility for their employees’ retirement, but they do have a moral responsibility to educate them in order to help them achieve a comfortable retirement.”

Nathan explains that this starts with requiring each fund member to draw up a financial plan and to review this annually. “The initial plan is far less important than the planning process itself. It is through the process that savers learn how much they need to save, how they should invest, how they should respond to market volatility and how much they can afford to pay in fees.”

The best way that fund members are able to plan is through the use of online retirement plans and calculators. Although these are commonplace, few are reliable. "The 10X Retirement Planner, which is available to the public on the 10X website, considers both an investors specific portfolio choice and the fees that they pay. These are the two key variables that drive a person’s long-term investment return. Any retirement plan that does not consider these two inputs will be heavily flawed," says Nathan.

Percentage of salary contributed

The employer must be aware of the contribution rates required in order for their staff to retire comfortably. This must be explained to staff on a regular basis, to encourage them to save at the required rate. Once employees understand why they need to save at a certain rate, they will be more motivated to do so.

As a rule, investors need to save at least 15% of their gross salary over their working life (40 years or so) to build an adequate retirement pot. The later that they start saving, the more they will need to save. Someone who only saves for 30 years will have to save at almost double that rate (27% of their gross salary) to compensate for the missed investment returns due to the shorter savings period.

How to invest

Fund members must understand their “investment risk” and invest accordingly. For short-term investors (less than 5 years) the risk lies in volatile returns. The risk for long-term investors is that their returns are too low to meet their retirement goal.

In other words, members must learn to match their investment portfolio to their investment time horizon. They should own a high equity fund (delivering more volatile, but ultimately higher returns than a low or medium equity fund) until they have less than five years to retirement. At this time, they should reduce the equity weighting each year in favour of defensive investments, such as cash and bonds. This can automatically be achieved using life-stage portfolios. However, if employees intend to invest in a living annuity at retirement, they still have a long-term investment horizon and should not necessarily change their investments.

Not responding to market volatility

The employer’s mantra to staff should be to ignore short-term stock market volatility and the market commentators who encourage investors to switch their fund or strategy based upon recent events. Investors should focus on maximising their investment at retirement, not on short-term market movements, which are unpredictable and unavoidable. Switching funds in response to this volatility not only adds to costs, but also diminishes the return as it invariably results in a “buy high, sell low” outcome.

Fees

Every 1% per annum that investors save in investment fees can sustain their retirement income level up to 12 years longer. Investors should never pay total fees of more than 1.0% pa of their investment balance, as high costs can derail even a diligent 40-year savings plan. While fees are inevitable, some can be avoided, negotiated or minimised.

Nathan says 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. “Employers can play an important part in establishing a savings culture, as well as improving our county’s savings rate. They can do so by mandating their employees’ financial planning and incorporating this into their employee benefit programmes.”

“The sooner that employees follow a sensible and realistic retirement plan, the better their outlook for retirement will be,” concludes Nathan.