Older generations of Americans likely remember a time when defined benefit plans were considered commonplace. Back when pensions were standard, workers could count on receiving guaranteed automatic payouts that were based on a formula that took their salary and the number of years they worked into consideration to determine their monthly income in retirement.
But, times have changed.
These days, paying for retirement has become primarily the responsibility of the employee. And even though defined contribution plans have become the new standard, today’s employees still aren’t necessarily sure where to start. As a result, according to one survey, one in three Americans have saved $0 for retirement – a frightening statistic!
As the fiduciary of your company’s retirement plan, it is your responsibility to help your employees understand the importance of saving for retirement and to help them make the best possible financial choices for their future. Failure to act in your employee’s best interest could result in penalties for noncompliance of carrying out your fiduciary responsibilities.
Plan sponsors who deploy the following actions can achieve greater results when it comes to enrolling their workforce into the company’s retirement plan. Read on to learn more.
Give employees a glimpse into their future
When it comes to analyzing the savings strategies of Americans and how they prefer to spend their money, behavioral scientists have found that people tend to “value money spent today much more than they value the idea of deferring their spending far into the future.” While it is true that this trend is due to the immediate psychological boost one receives when spending money sooner rather than later, some scholars have argued that the retirement education employees receive from their employer may be making the problem worse.
Scholars have noted that “even those forward-thinking sponsors who provide income projections are likely to find that presenting income numbers alone will not change savings behavior. One reason for this is seeing that large target amount needed for retirement is seemingly unachievable and the mindset of “why even start” takes over if a person feels they are unable to reach that goal. Another reason is that few participants find it easy to imagine their future selves and circumstances or – in language a psychologist would use – establish an emotional connection to their future selves.”
Researchers affiliated with the Stanford Center on Longevity found that those who saw an age-enhanced photo of themselves were willing to put an average of 6.8 percent of their salary into a 401(k) plan. Those who were not given a photo of themselves only committed to saving an average of 5.2 percent.
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 has found that workers are actually in favor of more aggressive defaults. In fact, 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, while seven out of 10 respondents might be interested in regular, incremental automatic increases. Plans with automatic enrollment have an 88 percent participation rate. In comparison, plans that require participants to enroll themselves only had a 48 percent participation rate. This is attributable to the fact that most individuals are the product of inertia.
Not only is the auto-enrollment feature a huge success, employers are also opting for a higher 6 percent default deferral rate, which allows employees to set aside even more retirement savings.
An article appearing on planadvisor.com, noted that 29 percent of 401(k) plans with automatic enrollment are now deferring 6 percent of salary into the plan.
Help employees go above and beyond with a solid monthly budget
Automatic enrollment and default deferral rates are great first steps, when it comes to preparing your employees for retirement, but in addition to saving for the future, your employees might need a few tips to free up some of their daily 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 77 percent are looking for additional financial education. This is a great opportunity for plan sponsors to step up and provide meaningful information to plan 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.
Finding the right balance between plan features and education is key to participant success in reaching their retirement goals.
Email Rea & Associates to learn more about retirement plan design suggestions and other ways to improve the overall financial wellness of your employees.
By Darlene Finzer, CPA, QKA, CSA (New Philadelphia office)