Human Resources |
Article by Doug Lynam, LongView Asset Management
From the July/August 2021 Net Assets magazine
Can you remember a bookmark moment in your life so profound that there will always be a “before” and “after” that moment?
My bookmark moment occurred when a good friend and colleague asked if I would help with her retirement plan. At the time, I was the math department chair and economics teacher at an elite private school — and also a Benedictine monk.
When we opened her account statement, I was shocked. Tracy was 64 years old, had served as a private school teacher for over 30 years and had only saved $15,000. Then, she asked me when she could expect to retire. Tracy is one of the strongest women I have ever known, but as I explained the gravity of her financial situation, she broke down.
I wanted to know how this tragedy had happened. So I began discussing retirement planning with my colleagues and discovered that many of them were in no better position than Tracy.
The unpleasant truth is private school retirement plans are often outdated or broken. For example, in 2016, there were 12 class-action lawsuits against Ivy League colleges for having poorly designed retirement plans.
This discovery sparked three questions: What would be an optimal retirement plan? Could it be built? Could it be socially responsible?
My encounter with Tracy changed the course of my life. After much soul-searching, I decided to leave the monastery after 20 years of service, gave up teaching and became an investment advisor.
The most important thing I learned is that helping teachers save for retirement is not a math problem — it is a psychological problem. Most of us have emotional issues with money to some degree, which lead us to regrettable financial mistakes.
Unfortunately, most retirement plans fail to take psychological behavior into account and assume we are rational and will always act in our own best interests. Or worse, plan designers tragically assume that teachers are financially literate and understand how investing works.
Building a robust retirement plan requires school administrators keep one core regulatory principle in mind: fiduciary duty. Fiduciary duty means the plan must be designed in the best interests of employees and their beneficiaries.
However, many private schools are unaware or have forgotten that they, as the fiduciary, are legally responsible for designing and maintaining their retirement plan. Instead, many schools mistakenly assume that the company they use for recordkeeping is a fiduciary.
As a result, plans may continue for decades with little oversight and fail to keep abreast of advancements in technology and psychology that can make retirement plans more robust and sustainable.
Equally important is strong retirement plans greatly benefit both schools and employees. Significant long-term cost savings can accrue by enabling senior faculty with high salaries to retire when they choose instead of prolonging their employment due to financial concerns.
When a teacher cannot retire when they are eligible, everyone suffers — teacher, administration, staff and students.
Here are 10 tips to ensure your retirement plan is effective, socially responsible and compliant with best practices in plan design.
The last tip is good news for conscious investors but terrific news for the health of our planet. As a bonus, participation and contribution rates often go up when employees know their investments help build a better world.
In 2018, I built the first socially responsible QDIA for any school or college. There were no off-the-shelf ESG target-date products available at the time, so we had to design our own.
That situation has changed. The first ERISA-compliant ESG target-date mutual fund series launched three years ago, the Natixis Sustainable Future Funds, and more companies are bringing them to market soon. As further proof that ESG investing can be profitable, three of the Natixis Sustainable Future Funds took top spots among all target-date funds in a recent Morningstar ranking.
A word of caution: in 2020, the Department of Labor ruled that employees’ financial interests are the only factors to consider when selecting investments, especially in a QDIA. The sustainable investments you pick must still meet the fiduciary standard of prudence and balance risk versus return. Pure “impact” investments, which intentionally place social good above expected returns, are not suitable for retirement plans.
In summary, design your plan so that participants are on track to a secure retirement — even if they do nothing. Use inertia, anxiety and self-doubt to the advantage of employees, not as unforgivable flaws punished by poverty in old age.
I believe you should protect the future you are investing in. If we are wise, ESG considerations will become a core part of fiduciary duty under the law. The children we are sending into the future deserve nothing less.
Managing Change In Your Retirement Plan (web-only, May 2021)
The Best Laid Plans: Retirement Investments and Fees (Jan/Feb 2020)
Default Disruption: Nuts and Bolts of QDIAs (Sep/Oct 2016)
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