The Answer Is… It Depends

Knowing why an employer sponsors a retirement plan can make or break the sale

by Tom Foster

Anyone who has ever shaken a “Magic Eight Ball,” the popular fortune-telling toy, and then asked a question about the future, knows the answer is highly variable. There are 20 possible answers to any question, from “It is certain” or “Yes” to “Don’t count on it” or “very doubtful.”

Ascertaining the reasons why an employer sponsors a 401(k) or other defined contribution retirement plan can seem like playing with an eight ball, with the only certain answer being, “It depends.” Or perhaps, “Ask again later.” The rationale for sponsoring a retirement plan can vary widely based on the size of a company as well as the role of the decision-maker.  Learning the reason or reasons behind the decision can mean the difference between landing or losing a sale.

It puts a premium on the need for fundamental fact-finding and underscores the importance of understanding whom will make the decision about sponsoring a retirement plan. Overall, most companies sponsor a retirement plan to improve employee satisfaction and to offer a competitive benefits package, according to the 2016 Winning Combination* study by MassMutual. The answers are logical and don’t require too many shakes of the fortune-telling orb.

But how tightly a company embraces those reasons can differ between the different functions, including human resources, finance and leadership. And other reasons can also enter the equation. How well you understand those differences and priorities can make or break a finals presentation for a retirement plan. But it can be difficult to get access to all of the decision-makers and become acquainted about their thought process until during the actual finals presentation. So what to do?

Top Priorities

Rather than relying on the fates, take matters into your own hands. At the start of the presentation, ask each person representing the plan sponsor to give you his or her top priorities and goals for the plan. Then write each of those goals on a white board or other space where everyone can see them.

During your presentation, make sure you address each of the objectives and priorities, explaining how you, the recordkeeper, or both would accomplish the sponsor’s goals.  Talk about what resources, programs and staff can be brought to bear to make the retirement plan as effective as possible.  Then, check off each priority as you address it and ask if there are any other concerns that you can speak to. Speaking to each decision-maker’s individual goals, concerns and priorities communicates that you are a good listener and are service-oriented. Everyone wants to work with someone who connects to their concerns, whether the person works in the corner office or the mail room.

So who from the sponsor cares most about what? MassMutual’s research shows there are differences in priorities on the part of different functional areas.

Company leaders, not surprisingly, are high on employee satisfaction (92 percent). If you have to stand before a large group of people on a regular basis, you don’t want to be looking out at pitchforks and torches. But there is some incongruity coming from the corner office, too. Leaders are a little less enthusiastic about offering a competitive benefits package (87 percent) than other functions (HR: 92 percent; Finance: 89 percent) but do see more value in attracting and retaining the best talent. Fourth on leaders’ lists was the need to help employees save for retirement. If your employees like you, I guess you want to keep them around.

Meanwhile, HR cares more about the importance of improving employees’ retirement readiness and offering a competitive benefits package. They speak the language of most retirement plan providers. Decision-makers in a financial role – the chief financial officer, for instance – tend to more readily embrace the tax advantages of offering a retirement plan, the study finds. Tax advantages are especially important for larger firms. Seventy-eight percent of plans with between $25 million and $75 million in assets under management favored tax advantages as compared to 56 percent of sponsors with less than $25 million in assets.

What benefits who… and why?

But let’s dig a little deeper. Those favoring tax advantages differ when it comes to who benefits from them: the employer or the employee. And who do they care about more, the employer, right? “Don’t count on it,” the eight ball says. Finance folks (85 percent) as well as HR (76 percent) and leadership (71 percent) are more likely to line up behind tax advantages for employees than the employer. Believe it or not, every function is less enthusiastic about the tax advantages for their employer, with finance (69 percent), leadership (55 percent) and HR (49 percent) pointing to those benefits as a reason to sponsor a retirement plan.

Anecdotally, there’s also evidence that finance people, CFOs in particular, connect with data that demonstrates the specific long-term value of a retirement plan to their company. That value stems directly from the ability to reduce the higher costs typically associated with mature workers for salaries and healthcare, disability and workers’ compensation insurance. If you can demonstrate the long-term financial benefits of retirement readiness, the CFO is all in. For them, the bottom line is the bottom line. Laying out the facts and figures as they relate to their company’s specific employee population and benefits liability creates tighter alignment between both employer and employee about retirement readiness.

Overall, the research shows that you can’t assume you understand the reasons or the rationale for why a company chooses to sponsor a retirement savings plan. You need to connect with the company’s decision-makers and ask them specifically why they want to offer a retirement plan and what they see as the specific benefits for their company.
Only then can you truly take a prescriptive approach and offer the right solution. Doing so will help create agreement on one point in particular: you — as their financial advisor — are a valuable asset to their company and its employees. Or, as the eight ball predicts, “You may rely on it.” ◊

*2016 Winning Combination study, https://www.massmutual.com/~/media/files/rs7153_brochure.pdf
This article is for informational purposes only and should not be construed as legal, investment, and/or tax advice.  Please consult your own legal counsel and other experts regarding the specific application of the information set forth herein to your own plan and/or circumstances.