In Practice September 7, 2012

40% of Small-Business Owners Have No Retirement Savings

Entrepreneurs cannot count on selling their business to fund their retirement, according to a survey conducted by The American College on behalf of BMO Harris Bank.
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A full 40% of small-business owners have no retirement savings or pension plan in place, the survey found. Additionally, 75% have no written plan on how they intend to fund their retirement.

“Business value can fluctuate significantly over the years, so it’s important to have personal retirement savings outside of your business,” says Dave Maraman, president of M&I, a division of BMO Financial Group. “Additionally, should the unexpected arise, such as a major health issue or needing to sell the business sooner than expected, having a retirement nest egg is important.”

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Financial advisers can help small-business owners set up a Simplified Employee Pension Individual Retirement Account (SEP IRA) and establish other savings portfolios, says Tina DiVito, head of the BMO Retirement Institute. Advisers who specialize in small business could have great success working with this target market by aligning with an accountant, a tax specialist and a lawyer, DiVIto says. They key is to make small-business owners realize that professional financial advice is critical to build a retirement savings portfolio independent of a small business.

“A financial professional can also help develop a detailed financial retirement plan that outlines your goals and progress,” she says.

Since small-business owners and entrepreneurs are so single-mindedly focused on their businesses, DiVito suggests that financial advisers tell these clients that saving for their retirement is like investing in themselves. “Although it’s tempting to concentrate solely on investing in their business, small-business owners owe it to themselves and their family to have personal retirement savings to help ensure a comfortable retirement,” DiVito says.

Advisers and their clients can find more information on estate and retirement planning at the BMO Retirement Institute microsite here.

 

 

The Markets September 7, 2012

Plan Balances for DC participants Take 2Q Dip

The size of defined contribution (DC) participant balances declined in the second quarter of 2012 by more than 2%, according to the Callan DC Index.
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The 2.09% contraction in balances reflected an average 2.56% market loss, which was marginally offset by 0.47% of contribution inflows from participants and plan sponsors. However, because of a strong first quarter, DC participant balances still experienced positive growth totaling 7.65% over the first half. Since the Index’s inception in early 2006, growth in plan balances have owed as much to net inflows (3.13%) as to return growth (3.14%); demonstrating the importance of robust participant savings levels.
 

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DC plans significantly underperformed corporate defined benefit (DB) plans in the second quarter, with DC plans down 2.56% (vs. declines of slightly more than 1% for DB plans). On the other hand, DC plans beat the typical 2030 target-date fund (TDF), which was down more than 3% for the quarter.

Since the Index’s inception, DB has outperformed DC by nearly 2 percentage points on an annualized basis. Over the same period, DC plans have outperformed the average 2030 TDF by about half a percentage point on an annualized basis. Target-date funds’ higher allocation to equities hampered performance over the period.

Despite their weak performance, TDFs managed to attract assets in the second quarter, as they have every quarter since the Index’s inception. In fact, six out of every ten dollars that moved within the Index in the second quarter flowed into TDFs. The tendency of these funds to attract monies even in down markets may be a reflection of participant inertia as much as actual confidence in these investments. In most cases, TDFs are the default in DC plans.

Most other DC investments saw net outflows during the quarter, with domestic large-cap, company stock and domestic small- to mid-cap particularly hard hit by outflows. However, turnover—which reflects net transfer activity levels in the DC Index—was modest during the quarter, coming in at 0.43% (about 60% of typical levels). This likely owes to the fact that participants typically do not react strongly to short periods of market weakness.

Domestic large-cap retains the biggest share of participant assets in the Index (24.3%). This asset class also has the distinction of having experienced quarterly net outflows more often than any other major asset class outside of company stock; with net outflows occurring nearly two-thirds of the time since the Index’s inception. Accordingly, large-cap stock has declined as a proportion of the Index from 32% in 2006 to just below 25% today. In contrast, target date funds have grown to represent 14.4% of overall Index assets (or more than 20% of assets in plans where they are available). Overall equity assets stand at 63.5%, which is slightly down from the first quarter.

The purpose of the Callan DC Index is to understand the asset allocation, track fund flows and measure the performance of DC plans. The equally weighted index tracks cash flows and performance of nearly 80 plans, representing greater than 800,000 DC participants and over $100 billion in assets. It is updated quarterly and reflects 401(k) plans as well as other types of DC plans.

Highlights of the index can be accessed here.

 

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