Employee options – making an informed decision about your retirement savings
The introductory article to this series summarised the three retirement savings options that typically are available to employees. These retirement savings vehicles include pension funds, provident funds and group retirement annuities. Under the umbrella of these primary options, employers generally compose one or more options for you, as an employee, to consider.
As an employer, setting up retirement fund options for staff is a complicated process
Setting up a retirement fund for employees can be a very complex process. Due consideration needs to be given to variables that compound the level of complexity. These include:
- Should we have one strategy?
- Should we have a combination of strategies?
- What kind of investments (such as offshore) should be included in the portfolio?
Most employers will appoint a group of representatives to run the retirement find with the combined interests of the employer and employees in mind. The responsibility to the employees and employer remains with the representatives who are encouraged to seek advice from suitably qualified advisers. An adviser will analyse the company’s requirements using a systematic approach (as shown in Chart).
Employer-employee communication is crucial when making a decision
After analysis, the solution may be a retirement fund that is standardised to meet the broad needs of all employees, or a mix of options for the employees to consider on an individual basis. However, this work could be meaningless if the communication process between employers and employees does not get the same attention as the investment strategy. Poor communication skills could lead to confusion and ill-informed decisions by the employees.
Investment strategy options – what suits you as an employee?
Even if you understand how your representatives decided on certain investment options, you may still need further clarity on what best suits your needs. Your human resources office would be the first step in gaining more information, but you should still seek the advice of a financial planner.
Investment strategies will generally take on three broad forms:
Single default strategies
An employer offering a single default strategy may offer no options for employees, but in some cases, employees do have options. Be aware that while it is simple, the broad objective of the single default strategy may be just right for you, but it could also over- or under-estimate your needs. Understand your retirement option sufficiently to simplify your selection process.
Lifestyle strategies offer attractive benefits as an investment strategy. However, you have no say on your retirement journey. As you get older, the strategy reduces risk in an automated fashion without your control. For example, if you have other investments and can afford to take additional risk, you may not want your risk exposure to reduce.
A combination investment strategy tries to capture the benefits of both approaches. Employees fall into the lifestyle strategy by default. More financially experienced employees can however customise their retirement plan using all three options. The combination investment manages the risk of employees making ill-informed choices and provides flexibility where appropriate.
Making your choice
The first step is to be as informed as possible. Once you clearly understand your options, you can use the following guidelines to make your decision.
- Know your objectives
- How long do you have until you retire?
- What do you need to retire comfortably?
- Understand your risk profile
- How would you feel if you lost 10% of your portfolio over the next say five years or six months, depending on how close you are to retirement?
- Understand your financial picture
- What retirement assets do you have?
- What are your other investments?
- Personal preferences
- Take into account your preferred way of investing (such as active, passive, balanced, specialist)
These tips can help you clarify what retirement investment plan you think is best suited to you. It is then best to consult your financial planner to ensure that you align your choice to your overall financial profile.
In the next and final article in this series, we will discuss the important question of how much you should be saving to retire comfortably. This series will provide you with a solid framework to choose or change your retirement plan.