The Hidden Pitfalls of Corporate Retirement Funds and Strategies for Longevity

By: King San Josè - Santos, RFP, CFC, CTA, FIFC

Chief Financial Planner | SJ&P Wealth Advisory

Retirement funds are essential for ensuring that employees can enjoy a secure and comfortable life after they leave the workforce. Unfortunately, many corporate retirement plans face significant challenges that can jeopardize employees' financial futures. With some funds experiencing declines or even bankruptcy, it is crucial for employees to be informed. This blog post will explore the hidden pitfalls of corporate retirement funds and present effective strategies to build more sustainable retirement savings.

Understanding the Structure of Corporate Retirement Funds

Corporate retirement funds are designed to help employees save for the future.

Establishing a retirement fund is crucial for companies to comply with employee benefit legislation, notably:

▪ R.A. 7641 – The New Retirement Law

Republic Act No. 7641 mandates minimum retirement benefits for eligible private sector employees, ensuring fair compensation as they retire. Employees aged 60-65 with at least five years of service are entitled to minimum retirement pay, safeguarding their financial security. Even without a formal retirement plan, employers must provide this pay.

Under R.A. 7641, retiring employees receive “one-half month salary for every year of service,” including:

i. 15 days salaryii. Cash equivalent of 5 days of service incentive leaveiii. 1/12 of the 13th-month pay

This equates to approximately 22.5 days of salary per year of service, ensuring fair retirement benefits.

R.A. 7641 excludes retail, service, or agricultural establishments with no more than ten employees and National Government employees, clarifying its scope.

Problems encounter in establishing a Retirement Fund

Poor management and a lack of transparency are common issues. Employees often trust their companies to manage their contributions wisely, but not all corporations have the expertise to handle investment strategies, especially during market downturns. For example, a study by the National Bureau of Economic Research found that poorly managed funds can yield returns that are 2 to 3% lower than their benchmarks.

Another concern is the lack of diversification in investment options. If a retirement fund heavily invests in one sector, it becomes vulnerable to losses when that sector underperforms. For instance, multiple funds that concentrated too much on tech stocks faced serious losses during market corrections in 2022.

Market Fluctuations and Economic Downturns

Economic fluctuations can have a dramatic impact on corporate retirement funds. Recessions, stock market crashes, and other financial crises can lead to decreased account values. For instance, during the 2008 financial crisis, the average retirement account balance fell by almost 27% as investments in stocks and real estate plummeted.

After such downturns, employees can find their retirement savings significantly diminished. Often, these events reveal the vulnerabilities of underfunded pensions and the dangers of poorly diversified investment strategies. Understanding how economic trends impact retirement fund health is essential.

Other Compliance Concerns:

R.A 4917 - An Act stipulating that Retirement Benefits for Employees of Private Firms shall not be subject to Attachment, Levy, Execution, or any form of Taxation

This law ensures that employees are not subject to Attachment, Levy, Execution, or any form of Taxation if the employer has a Reasonable Private Benefit Plan (RPBP).

The law offers a tax-exempt retirement benefit if the retiring employee has served the same employer for at least 10 years, is at least 50 years old, and the benefit is claimed only once.

Additionally, the law grants exemption for any amount received by the employee or their heirs from the employer due to separation from service caused by death, illness, or other physical disability, or for any reason beyond the employee's control.

Our Strategy for Creating an Improved Retirement Fund

Now that we have examined some pitfalls, let's focus on proactive strategies. Employees can take steps to ensure their retirement funds are more resilient.

Highly Trained Experts

Ensuring that your account is managed by highly skilled professionals from start to finish is crucial.

We are proud to inform our clients that our team consists of highly trained individuals who hold international certifications and multiple licenses. You can be confident in achieving optimal results while safeguarding the security of your funds.

Investments Co mingled with INLIFE Funds. Taking out the conflict of interest

The advantage of combining with INLIFE Funds is that it eliminates any conflict of interest, ensuring the safety of your funds. Inlife strategies are thoroughly tested because they impact not only the performance of your fund but also that of our internal funds. Essentially, we are investing in what we trust.

Complimentary Initial Actuarial Assessment

Our complimentary initial actuarial assessment helps organizations and individuals understand their financial risks and obligations. It evaluates specific needs and funding requirements, providing crucial insights for informed decision-making.

Understanding Your Needs

Our experienced actuaries analyze factors affecting your financial landscape, including current commitments and future liabilities, to tailor recommendations to your goals.

Evaluating Funding Options

We explore various funding strategies, assessing traditional and innovative solutions to optimize your financial resources and highlight areas for improvement.

Long-Term Financial Benefits

The assessment identifies risks and inefficiencies, helping develop strategies for cost savings and resource allocation, enhancing financial stability over time.

Risk Free Rate. Unlimited upside potential

Our retirement fund ensures a risk-free base rate, protecting your investment from market fluctuations and volatility. It also allows you to gain from half of the potential percentage increase. This option is superior to fixed rates and term deposit rates, providing a hybrid exposure to both equities and time deposits. For instance, it offers a 2.5% base rate with unlimited upside potential, depending on market behavior.

Regularly Monitor and Adjust Contributions

Regularly reviewing contributions to retirement funds is essential. We assist our clients in tracking market behavior and understanding market allocation. Our internal team, along with secondary and other professional analysts, can help you monitor your funds in real-time.

Other Financial Services

Administrative services

From filing for tax excemption to distribution to your employees, we can help and support your company for free, thus saving more time and money for your business.

Other Services

From non-life insurance and healthcare to CFD foreign exchange brokerage and personal financial services centered on employees, including life insurance, accident insurance, and various investment and insurance protections, you can trust that all these services are conveniently offered in one place.

Final Thoughts

Navigating corporate retirement funds comes with several challenges, including market fluctuations, regulatory issues, high fees, and mismanagement. By understanding these pitfalls and implementing proactive strategies, employees can work towards more secure retirement savings.

It is never too early or too late to invest time in understanding and improving retirement plans. By focusing on financial literacy, diversifying investments, engaging with benefits programs, regularly monitoring contributions, and seeking professional advice, employees can pave the way toward a more secure financial future.

The risks in corporate retirement funds are real, but with knowledge and action, employees can avoid these pitfalls and build a lasting retirement legacy.

Start the Journey Today

Start Your Retirement Fund Today Ensure future financial stability by starting your retirement fund now. Schedule a Discovery Call with a Corporate Financial Consultant to assess your finances and receive personalized advice. It's never too late to invest; early investments gain from compound interest. Click the link to schedule your Discovery Call > and start your stress-free retirement journey.

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