Discover the Hidden Value in Your Organization’s Retirement Plan for a Post-Coronavirus Pandemic Era

The coronavirus has upended business as usual and we’re all concerned about what our life, career and business will look like in a post-coronavirus pandemic era. And how we respond to the challenges today will determine the success we enjoy tomorrow. 

An interesting study conducted by Gartner in 2019 found that companies who opted to “stay the course” during the financial crisis of 2008 – 2009 significantly lagged their more progressive peers in the eight years following the crisis. The progressive leaders sought opportunities instead of hunkering down into survival-only mode, positioning their firm for stronger growth during the recovery and beyond.

During this pandemic we need to rethink every aspect of our business and target key areas with the highest value potential. The pandemic has exposed the financial and retirement insecurity of our workforce and reinforces the fact that, as employers, we must take a more active role in securing their retirement. Doing so creates a sustainable strategy of recruiting, retaining and retiring the key talent that’s essential for a successful business. 

In a thriving economy a common strategy is to throw more money to a problem, but in a challenging and uncertain time a prudent approach is to seek efficiencies and new strategies that deliver the value we should have expected all along. This doesn’t mean we have to venture into uncharted waters but question the status quo and engage experts to help us navigate to a new normal that we define for ourselves and our businesses. 

Evaluating Decisive Leadership

When faced with obstacles, I find it challenging to make critical decisions because I know I’ll be judged, or at least judge myself, on how those decisions turn out. But once the challenge is past, we can look back to test our decision. Did I seek all available information? Did I ask probing questions to drill into the details? Did I engage my teammates and rely on their expertise? Based on the information and resources available, did I make the right decision? That’s the ultimate checkpoint and we should be able to answer affirmatively. 

So with the challenges we’re facing in this pandemic, how are we going about testing the decisions that will define the new normal for our business and capitalize on the opportunities where others may falter? It’s almost certain that in the near-term the economic recovery will not be a quick V-shape or slower U-shape but more of a slight rebound with an extended sluggish, almost flat recovery that may go on for several years. (The square root symbol is a good visual.) Regardless of the path or trajectory the recovery takes, let’s identify strategic initiatives that will build a stronger organization and deny our competitors an advantage. 

Organizations that rely on a trained workforce understand the importance of recruiting, retaining and retiring superior talent. In the pre-pandemic economy, the labor market was tight with the unemployment at an unprecedented low. There was stiff competition for key talent, so companies had to allocate more resources to secure the needed staff to propel their business forward. 

The disruptive pandemic provides a unique opportunity to reevaluate our decisions around how we go about recruiting, retaining and retiring key talent. The strategy of throwing more money at the problem is not prudent, so what do we do?  Hunker down and ride out the storm or proactively search for hidden value in the tools and resources are already in the organization? 

Retirement Plans Present an Opportunity

One untapped resource is the organization’s retirement plan. Typically, it’s in the form of a 401(k) arrangement where employees make deferrals and receive an employer matching contribution, and if the plan is creative, it may have a profit sharing component. Let’s think about this for a second. If it’s a retirement plan and I match the employee contributions, is it really a retirement plan or just another line-item expense on the financial statements? Probably more of the latter than the former. 

What value does the plan bring to the organization (recruit, retain, retire talent) when everyone who defers four percent gets a match of four percent? Maybe the only value is for the employees eager to save four percent so they can get a four percent match. How does this one-size-fits-all approach add value to my entire organization, not just those who are eager to save?

These are valid questions that we must ask our service providers and not accept pat answers. Our business, our career and our obligation to the stakeholders depend on digging into the details to uncover the information we need to make the right decision that will redefine our organization on the other side of this pandemic. 

Stepping back for a second to refocus on the purpose of a retirement plan is to retire employees on time so the organization can maintain a healthy labor cycle. Is our plan achieving that aim? When employees’ compensation varies across the organization, but the retirement benefit of a four percent match shows otherwise. Probably not. Does the one-size-fits-all matching contribution help me recruit the talent my organization needs? Does my company’s 401(k) plan includes the features and provisions that will help me retain key staff until they retire? 

I may step out on a limb here, but I doubt we could affirmatively answer yes to these questions. If that’s the case then how do we turn this retirement plan expense into a valuable resource that adds enterprise value to the organization without driving up cost? 

Driving Performance through Grouping

We can divide the talent in any organization into three distinct groups; C-suite executives, key managers, and everyone else. Key managers are a critical group for any organization and it would be disruptive if they left. For discussion we’ll refer to C-suite executives as Group A, key managers as Group B and all other employees as Group C. In the typical organization, the compensation across the three groups can vary dramatically but their perceived benefits may be uniform which can give rise to a mis-match on the allocation of resources across the three groups. Excess benefits to a group that may not need as much and less to a group that needs more. 

For example, the employer pays health insurance for all its employees at a cost of $6,000 per year per employee. The health insurance benefit equates to 15% of pay for a $40,000 per year salary of a Group C employee and 6% of pay for a $100,000 per year salary for a key Group B employee. The retirement plan will replace 84% of the Group C’s income at retirement, but only 69% of Group B’s income and 55% of Group A’s $200,000 annual salary. The one-size-fits-all model doesn’t address the needs of a typical organization’s workforce so how can we realign resources for a fair retirement solution that meets the needs of all three groups? 

Let’s assume we want all our employees to retire with at least 70% of their current pay, that means that the employer contribution for the Group C employee  would be 2.2%, Group B 4% and 7.3% for Group A. Group C’s benefits (health insurance + retirement) are 17.2% of compensation, 10% for Group B and 10.3% for Group A. Everyone in the organization has uniform benefits but the financial resources needed to achieve uniformity will shift to Groups A and B. 

Another way of looking at this is that social security will replace about 19% of Group A’s income, 33% for Group B and 49% of Group C’s income. This means that Group A has a sizable gap to close over their working career and they can’t miss a beat or they’re behind. Group C’s gap is much smaller with greater flexibility to adjust as needed in the near-term, so we shift financial resources to achieve the organization’s long-term goals. 

Assuming a typical dispersion of employees across the three Groups, the reallocation of financial resources for retirement decreased by 7%. So recapping, we spent less money and ensured the employer’s contribution will put everyone in the organization on track to retire at 70% of pay. The cost reductions, 7.0% in our example, is redirected to poach the key talent of our competitors. This is not a novel concept but one with a lengthy history that’s often forgotten. 

After the United States entered World War II, there was such a demand for goods and services the federal government’s concerned about run-away inflation so through passage of the Stabilization Act of 1942 they capped employee’s pay at their current rate so employers could no longer compete on hourly rates alone. Using unrestricted benefits, progressive employers used this work-around to attract the employees they needed to get the jobs done. A few decades later and employers have the latitude to factor in social security benefits, offsetting some funding cost for an employee’s retirement. The point is there are multiple provisions in the regulations with a lengthy history of giving businesses the flexibility they need to create long-term sustainable retirement plan solutions. 

Since introduced over forty years ago, 401(k) plans have been the go-to solution for an employer-sponsored retirement plan, but unfortunately businesses and their advisors have not tapped into its true potential. Creating employee groups so financial resources can be deployed strategically to fulfill a specific need instead of a one-size-fits-all approach will make a measurable difference with key employees and executives vital to the organization. 

Retirement security for all employees, not just those eager to save, begins with employers seeking alternatives that their incumbent providers have failed to mention. In a post-coronavirus pandemic era, progressive leaders must define a new normal for their organization or it will be defined for them. Make the commitment to unlock the full potential in your organization’s retirement plan. The rewarding possibilities are endless. 

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