When health care reform moves off the front page, financial executives will find another benefit issue demanding their attention: employees' financial readiness for retirement. With U.S. employers reducing their commitment to retirement programs — in some cases, dramatically — employees have had to assume greater responsibility for their financial security. Few are well equipped to do that.
Is it the employer's job to help them? Not entirely, of course.
But there are significant financial and operational consequences for companies whose older workers can't afford to retire. Because people generally don't save enough to cover their retirement needs, especially taking into account increased longevity, many, if not most, will have to work longer than they'd planned. This will exact a considerable toll on their employers. From a financial perspective, there will be higher salaries to pay to longer-tenured workers who, in general, incur greater health care costs. In addition, employees who continue to work primarily because they can't afford to retire are likely to be less engaged and productive than other workers. They can also contribute to blocked career paths, increasing the risk of losing critical talent or new skill sets.
The job of addressing this problem falls to both employees and employers. Employees need to be able to evaluate and prepare for their future, make smart decisions and, above all, start saving early and in the right ways. Current estimates suggest that total annual savings of between 12% and 15% of pay are required to retire at age 65 if an individual begins saving early in his or her career. For those starting later, total annual savings of between 20% and 40% of pay will be necessary to retire by age 65. Employers, for their part, need to understand the hidden costs and take action to protect the organization from unpredictable retirement patterns.
How did we end up here?
The details of how we got to this point are well known. Legislative, financial and economic hurdles, together with significant demographic changes, have made it financially challenging for employers to continue providing traditional defined benefit (DB) pension plans and medical coverage for retirees. As many companies have moved to defined contribution-only retirement strategies, employees' ability to have a secure retirement at a predictable age has diminished.
Retirement readiness assessments find that for the typical workforce, the median age of reaching financial independence is well past age 65, with half of the workforce unlikely to be able to retire before age 80. Despite several years of retirement-related communication aimed at employees, many haven't gotten the message about preparing for retirement. Young workers, particularly, often don't internalize these messages and aren't ready to embrace the required behavior changes. And some employees don't understand the various retirement vehicles available to them, such as Roth 401(k) contributions and health spending accounts (HSAs). Also, many lack the knowledge to make informed investment decisions.
What can employers do to become part of the solution?
- Understand the retirement readiness of your workforce and what actions your organization should take to improve it. Although most employers routinely receive reports on employees' 401(k) plan participation and investment elections, that information generally isn't sufficient for them to draw useful conclusions about retirement readiness. But the sophisticated planning and analytic tools now available go well beyond this basic level of information and provide data crucial to making good decisions about plan design, communication and education. Aggregating data on employees' company-sponsored sources of retirement income and their current behavior patterns regarding plan elections, contributions and so on, company decision makers can get a clear view of what percentage of the workforce will be able to retire at what ages, what percentage is unprepared for retirement, and what actions would best improve retirement readiness given the characteristics and demographic profile of the workforce.
Providing compensation in the form of contributions to tax-qualified retirement plans and HSAs in lieu of cash can affect how soon employees may be able to retire, and can achieve savings for the company.
- Review your program design, and ensure plans are tax effective and structured to support saving in the right ways. A good first step is to review the extent to which your compensation dollars are allocated to programs that enhance employees' retirement readiness. For example, providing compensation in the form of contributions to tax-qualified retirement plans and HSAs in lieu of cash can affect how soon employees may be able to retire, and can achieve savings for the company. It's also important to review your 401(k) investment lineup to ensure that your selection of funds and your expenses are reasonable.
- Help employees get real about retirement planning. Engage employees in discussions about financial wellness, including the decisions and behaviors needed to retire at a reasonable age. Topics typically include ideas on how to save more and choose the right investment strategies. Employers can also help workers understand the tax-related issues and appropriate use of various savings vehicles, from 401(k) savings plans and Roth IRAs, to HSAs and personal savings vehicles. Increasingly, companies are taking a page from consumer marketing and building multimedia campaigns around retirement readiness. They combine webcasts, print mailings, local office events, quizzes and games to increase employees' knowledge, plan participation and savings rates, and reduce their anxiety about investment decisions.
Savvy employers are increasingly using tools that customize information to target various workforce segments based on these factors, to grab workers' attention and promote behavior change.
- Take advantage of the sophisticated tools available to segment the workforce and develop communication aligned with employees' life stages and personal situations. How much employees can and should save, and how they should do it, varies tremendously across a range of demographic and interpersonal factors. These include the person's job role, age, affluence, life stage, health status, educational level, technological sophistication, financial awareness and information/media preferences. Savvy employers are increasingly using tools that customize information to target various workforce segments based on these factors, to grab workers' attention and promote behavior change. For example, some are personalizing employee mailings based on how much the targeted individuals contribute to company-sponsored savings plans and suggesting ways they could improve their financial situation.
- Measure progress. It's important to track results by monitoring the effectiveness of campaigns and programs, as well as changes in the workforce's retirement readiness. It's typically necessary to recalibrate and refine tactics over time to ensure that both the information and its presentation remain relevant, engaging and user-friendly. As tools and technology have evolved to allow employees to model their own what-if scenarios, so must employers change the ways in which they connect with employees on this significant issue affecting both parties.
Helping employees prepare for retirement is not an easy assignment, but it's important to remember that employers have a financial interest in trying to do so. To be effective, employers must partner with their employees to plan for and build a financially secure future before it becomes simply too late.