Take A Look At Your Retirement Plan
Many older Americans probably remember when defined benefit plans were considered commonplace. During that time, pensions were standard and workers could count on receiving guaranteed automatic payouts in their retirement from their employers. These pensions were based on a formula that took an employee’s salary and the number of years they worked into consideration to determine their monthly income in retirement.
For the most part, that’s no longer the case.
Nowadays, it’s up to each individual employee to fund their retirement. But, today’s employees aren’t necessarily sure where to start. As a result, according to The Real Deal study by AON, only one in three workers will save enough to retire comfortably by age 67. That is not a great statistic.
The study estimates that employees should defer 16 percent of their annual pay (including employer contribution), beginning at age 25, to accumulate 11.1x pay at age 67 – the amount the average employee needs to save for an adequate retirement.
But just because the responsibility ultimately lies with your employees doesn’t mean that you should be content to do nothing to help them reach their goal. As the fiduciary of your company’s retirement plan, your responsibility is to help your employees make the best possible financial choices for their future. Failure to act in your employees’ best interests could result in penalties for noncompliance of carrying out your fiduciary responsibilities.
Beyond Fiduciary Responsibilities
Companies need to offer more than just a salary and benefits. Retirement readiness options can actually help your business attract and retain employees. One of the main reasons employees find company retirement plans so appealing is that many don’t save for retirement outside of the workplace. Even for some highly compensated earners, the company-sponsored retirement plan is their main source of retirement savings.
A competitive retirement plan can motivate younger staff as well. With a good plan, they see an opportunity to grow their wealth within the company rather than seeking their fortune elsewhere. In a recent MetLife study, four out of 10 employees said retirement benefits are a huge factor when deciding to stay with their employer. Interestingly, this is particularly true among millennials, who feel the strongest about this compared to their generational counterparts.
Ways to Get Employees On Board
Plan sponsors who deploy the following actions can achieve greater results when it comes to enrolling their workforce into the company’s retirement plan and, in turn, hopefully keep valuable talent.
Give Them The ‘Why’
People tend to care more about their current spending needs and less about their future financial wellness. This may be due to the benefits of immediate gratification, but some scholars argue the retirement education employees receive (or lack thereof) from their employer may be making this problem worse.
Just showing employees what they need to retire instead of explaining how to get there and why it’s important can have a detrimental effect. Sometimes employees see a big figure and figure “why bother – it is never going to happen.” Communicating regularly and compellingly with employees is the key to solid participation.
Embracing the auto-enroll feature just makes (dollars &) cents
At a time when few employees will make a conscious decision to save a portion of their paycheck, a national survey conducted by American Century Investments found that workers are actually in favor of more aggressive defaults. The study found that “plan participants count on their employers’ direction and guidance in helping save and invest for retirement.” The same study also reported that around 70 percent of respondents believe automatic enrollment is something their employer should do as well as offer regular, incremental automatic increases. Plans with automatic enrollment have an 88 percent participation rate. In comparison, less than half of employees participate in plans that require them to enroll themselves.
Help employees go above and beyond with a solid monthly budget
Your employees might also appreciate a few tips to help them free up some of their day-to-day funds. General budgeting knowledge, including household expenses, emergency savings and credit card debt are valuable to those looking for ways to make their money go further.
Researchers have found that more than half of consumers consider the development and follow-through of a monthly budget as a top financial priority, while nearly 80 percent are looking for additional financial education. This is a great opportunity for plan sponsors to step up and provide meaningful information to participants in a way that is valuable to them. At that point, they will likely be willing to learn more about executing a retirement savings strategy as well.
Pre-tax and post-tax features and expanded investment and enrollment options give the employee an enhanced feeling of control, which can translate into higher enrollment numbers.
Another compelling feature is a strong matching program – especially one that’s tied to tenure or promotions.
In conjunction, making a Health Savings Account available is also an excellent way for workers to save for retirement. Since HSAs are never taxed, a small amount contributed to an HSA can really add up to significant income in retirement to cover medical costs.
Investing in your employees is key. Even better is finding the right balance between plan features and education for participant success in reaching their retirement goals. Give me a call to learn more.
By Paul McEwan, CPA, MTax, AIFA® (New Philadelphia office)