Pentegra :: Designing The Right Retirement Plan For Your Organization



Retirement programs are a critical element in designing total compensation programs for today's financial institutions. In a highly competitive employment market, benefits and compensation are critical tools in attracting and recruiting quality professionals.

Retirement plans represent a substantial financial investment for employers-likely among the largest investment a financial institution can make in its people. Maximizing that investment means designing a retirement program that meets your organization's business as well as benefit objectives.

Designing an effective retirement program for your organization starts with a review of your management philosophy, compensation strategy, the different types of plans available, an analysis of what your peers offer, and considerations such as demographics and the maturity of your institution.

Successful plan design also means different things to different types of institutions. Stock institutions will typically integrate company stock with retirement plans. Mutual institutions, without the ability to offer company stock based capital accumulation programs, will generally provide somewhat richer defined benefit and 401(k) plans.

In the final analysis, however, all community based financial institutions share a similar goal-to attract and retain valuable employees in order to provide a high level of customer service and to enhance the growth and profitability of the institution.

Designing a retirement program that accomplishes these goals begins with understanding an organization's business objectives and how those objectives translate into a benefits philosophy. There are two basic approaches that a company should consider in developing a benefits philosophy.

The first centers on an "Objective" Approach-that compensation and benefits are offered in order to fulfill a specific function, (i.e., to provide employees with sufficient retirement benefits). The adequacy of the benefits involves an analysis of what level of compensation and benefits allow an employee to maintain a certain standard of living.

The other is a "Competitive" approach-that attractive benefits and compensation packages are offered in order to attract and retain employees. Benefit programs should be viewed as an important component of total compensation. Adequacy of total compensation involves an analysis of wages and the level of benefits offered by competitors.

It is important to recognize that while these two approaches are different, they are not exclusive. The successful benefits program will reflect a blend of both philosophies.


The objective approach involves examining the level of income needed in order to retire comfortably. We use replacement ratios as a tool in determining how much income a retirement program should provide when viewing these programs from an objective perspective. A replacement ratio is the percentage of gross pay prior to retirement that one needs after retirement to maintain the pre-retirement standard of living. It takes into consideration the fact that the post-retirement standard of living will reflect lower taxes and other fixed costs.

Experts recommend that employees retiring in the next few years will need between 70% and 90% of their pre-retirement income to maintain a similar standard of living in retirement. These factors take into consideration the fact that post-retirement standards of living reflect lower taxes and other fixed costs. However, they do not take into consideration the impact of inflation on purchasing power after retirement. The table below illustrates how this percentage varies, based on pre-retirement income.

Annual Pay Before Retirement Replacement Ratio
$15,000 82%
20,000 76%
30,000 72%
50,000 72%
70,000 75%
90,000 83%

Retirement income comes from three basic sources: Social Security, an employersponsored retirement plan, and personal savings.


Social Security was never intended to be the total source of retirement income - but rather a safety net. The age to qualify for benefits will increase as younger employees will not be eligible to receive full benefits until age 70. Annual cost-of-living adjustments may be curtailed in the future as Congress struggles with budget deficits and the anticipated Social Security shortfall which will occur as the wave of baby boomers exhausts current reserves - by the year 2015. While an employee (married, non-working spouse) retiring at age 65, currently earning $20,000 can expect nearly 68% of final salary from Social Security (Primary plus spousal benefit), higher salaried employees have a gap of over 60% to meet the study's recommended replacement goal.


The next level of protection is generally provided by the employer's plan or plans. The level of income replacement from employer plans is dependent on variables including the employee's salary, length of service, retirement age, and the employer's plan type/formula/match etc.

Defined benefit plans might be structured to provide from 30% to 40% of the total replacement income needed, depending on the employer's benefit and cost objectives. This type of plan usually provides an annuity at retirement.

Defined contribution plans are a potential, but less certain source of the replacement ratio mix. Plan structure, employee investment savvy and length of time in the plan are all factors which must be taken into consideration in determining how much income the plan will provide. Typically, these plans provide between 10% to 30% of replacement income. Unfortunately, studies show that more than 30% of lump sum distributions from these types of plans are spent well before retirement.


In order to remain competitive in today's business environment, a financial institution must also analyze the level of benefits it provides in relation to its peer group. The basis for providing a competitive benefit program for a financial institution is twofold. In order to attract talented personnel, it must offer both adequate and attractive benefit plans in relation to its peers. While some turnover is unavoidable, financial institutions that provide competitive benefit plans will generally experience lower turnover among middle and upper management positions within their institutions. While the cost of providing such a benefit program can be high, the cost associated with turnover or failure to attract and hire the professionals you need to run your business can be substantial. In order to retain middle and upper level managers and offset turnover in lower management positions, financial institutions should consider a combination of retirement benefit plan options.


Retirement plans represent a substantial financial investment for employers. Maximizing that investment means working with a provider that's best able to meet your organization's business as well as benefit objectives. As plan sponsors continue to look more critically at their retirement providers, choosing the partners and products that allow sponsors to best achieve plan objectives requires in-depth analysis to ensure a "best" fit not only for organizational goals but also the "best" interests of participants.

Reputation, history and stability

Providers should have a demonstrated experience in the retirement plan industry, a solid track record and reputation. Are retirement plans their only business? How long have they been in the business? What is their client retention rate? Do they have experience administering your unique plan features, or with similar workforce demographics or industry specialization/niche capabilities? Ask about the level of experience their teams have-their account loads and turnover. Also remember to ask if there is a formal monitoring process in place for service quality standards.

Cost transparency

With retirement plan investing, it's not what you make, but what you keep. Apart from fees charged for administration of the plan itself, there are fees that may be charged in connection with plan investments.

Sales charges are basically transaction costs for the buying and selling of shares. These charges may be paid when you invest in a fund (known as a front-end load) or when you sell shares (known as a back-end load, deferred sales charge or redemption fee). A front-end load is deducted up front and, therefore, reduces the amount of your initial investment. A back-end load is determined by how long you keep your investment. There are various types of back-end loads, including some which decrease and eventually disappear over time. A back-end load is paid when the shares are sold (i.e., if you decide to sell a fund share when a back-end load is in effect, you will be charged the load). These fees are typically charged to offset commissions paid to brokers. Mutual funds also may charge 12b-1 fees, which are ongoing fees paid out of fund assets. 12b-1 fees may be used to pay commissions to brokers and other salespersons, to pay for advertising and other costs of promoting the fund to investors and to pay various service providers to a 401(k) plan pursuant to a bundled services arrangement. They are usually between 0.25 percent and 1.00 percent of assets annually.

Management fees are ongoing charges for managing the assets of the investment fund. They are generally stated as a percentage of the amount of assets invested in the fund. Sometimes management fees may be used to cover administrative expenses. Management fees can vary widely, depending on the investment manager and the nature of the investment product.

Surrender and transfer charges are fees an insurance company may charge when an employer terminates a variable annuity contract) before the term of the contract expires. This fee may be imposed if these events occur before the expiration of a stated period and commonly decrease and disappear over time. It is similar to an early withdrawal penalty on a certificate of deposit or to a back-end load or redemption fee charged by some mutual funds.

The bottom line-look for funds with low expense ratios and understand your total transaction costs.

Total retirement solution Seek providers who approach plan design as a total retirement solution, and have the ability to offer defined benefit, defined contribution and nonqualified plans. An integrated approach means that all the information you and your employees need is available through a single provider, simplifying information access for you and your staff. Does the provider have a team of in-house retirement benefits experts (ERISA attorneys, actuaries, benefits consultants, investment managers and education specialists) available on a direct access basis? Is this a standard part of the product offering or is there an additional cost for these services?

Look for providers who can deliver:

  • Coordinated plan enrollment, conversion and implementation
  • A single point of contact for plan administratio
  • Integrated plan reviews & communications
  • Across the board plan design changes and amendments
  • A single Internet site with access to consolidated plan information
  • Comprehensive compliance testing across all plans.

The Pentegra Advantage

Because selecting the right retirement plan is so important, we invite you to consult Pentegra Retirement Services. With more than 65 years of experience in serving the retirement plan needs of financial institutions nationwide, Pentegra delivers distinct advantages.