A workforce that is unprepared financially for retirement can hurt company profits and productivity levels. When employees continue to work beyond their desired retirement age because they lack sufficient retirement savings, it's not only a physiological blow for them but a very expensive proposition for the organization as well.
The most recent financial crisis has taken a bite out of many retirement nest eggs, delaying retirement dates for employees. According to a 2011 survey by the not-for-profit Employee Benefit Research Institute (EBRI), the poor economy and weak financial markets have caused roughly 24 percent of workers in the U.S. to postpone their expected retirement until after the age of 70. In addition, there has been a three-fold increase to the number of workers who are “not at all” confident that they will live comfortably through retirement.
A proactive approach can help limit the number of employees who have to work beyond a normal retirement age of 65. These efforts not only can result in an appreciative and productive workforce but also can produce cost-saving opportunities for the company.
The implications of employees who have no financial choice but to work into their late 60s and even 70s might not seem significant—on the surface. However, the challenges reveal themselves in an evaluation of the costs of those employees to the organization:
• Health care expenses for employees over age 65 are more than double those of employees aged 45-55
• When of work-related accidents take place, their severity and paid time away from work increase substantially for employees over age 65, even though the rate of accidents does not increase dramatically.
• Salaries and other compensation tend to be higher for an older employee with tenure than for a younger employee with a similar skill set.
• Productivity (which varies greatly among individual employees) can drop off substantially.
Viewed in light of the above, the costs of a non-retirement-ready workforce can be substantial.
Presenteeism can result from the stresses of financial instability and unpreparedness for retirement. Presenteeism is when an employee is physically at work but not functioning at full capacity. Financial stress can lead to moral hazards such as theft, fraud, exaggerated workers' compensation claims and other issues. While fostering a more financially confident workforce does not eliminate these issues, it can reduce their frequency and severity.
Health care costs, workers' compensation and payroll expenses may be lowered when employees are prepared to enter retirement at a normal age. The six steps detailed below represent a roadmap on how to start promoting a culture of retirement readiness:
1. Conduct a company retirement readiness assessment.
How many employees are within five, 10 and 20 years of retirement? Based on their income, participation in the company’s retirement plan, salary deferral rates and account balances, are they on track for a comfortable retirement? This evaluation can be an eye-opening exercise. When you have an understanding of how different segments of the workforce are using (or not using) the retirement plan, it's easier to develop strategic actions to improve their retirement readiness.
2. Evaluate the plan design.
Are the provisions in the 401(k) or other defined contribution plan conducive to helping employees accumulate enough money to convert into a steady stream of income during retirement? How long after they are hired can employees start contributing? Does the organization offer a Roth 401(k) to provide a tax diversification strategy? Does the plan use automatic enrollment and/or automatic salary deferral increases to increase participation and savings rates? What about funds that target a certain risk level or retirement age?
There are several plan design opportunities to help start and keep employees on the right track toward retirement. The key is understanding the workforce and then making decisions that support employee retirement readiness and other corporate goals.
3. Develop targeted employee communications focused on changing behaviors.
A 25-year-old employee is going to have very different questions and concerns about the company’s retirement plan than a 55-year-old employee. However, many companies try to communicate with and educate their employees using the same materials and messaging for everyone. When messages about the retirement plan target multiple demographics purposefully, response and adoption rates increase. In addition, when targeted messages are combined with behavior modification enablers such as “take action” cards and e-mails that have one-button solutions, the odds increase that employees will take the encouraged actions voluntarily.
A 25-year-old employee will have very different questions
and concerns than a 55-year-old employee.
Many companies have been unsuccessful in influencing participant behavior because they focus on providing information and then rely on participants to connect the dots. Employees want to be guided. Retirement readiness can be improved greatly when they are helped to arrive at the right decisions easily and painlessly.
4. Consider retirement income solutions.
Ill-timed changes to an employee’s investment selections and stopping contributions pose some of the biggest threats to retirement savings. Many times, employees make these generally poor choices out of fear, panic or other emotionally charged reasons.
Retirement income solutions are a recent entrant to the 401(k) marketplace. While the specifics vary by provider, they generally offer an in-plan annuity to help protect a participant’s account from losses while allowing some participation in the gains of a rising market with a guaranteed minimum stream of income at retirement. These participant-elected options should, at a minimum, be discussed by plan fiduciaries. While one can argue about the financial benefits, the physiological benefits of protecting their 401(k) balances can help employees stay on track.
5. Be strategic with matching dollars.
If the organization is making matching contributions, it should re-evaluate its formula. Studies have shown that many employees will contribute only enough to get the full company match that the formula allows. If the employer is matching only the first 2 or 3 percent of an employee's deferred salary, it should be no surprise that a large percentage of employees are contributing only 2 or 3 percent to their salary to the plan.
To encourage employees to save more each year, consider raising the target matching percentage. For example, if the organization has been matching 50 percent of the first 3 percent of contributions, consider changing that to 25 percent of the first 6 percent. There is no increase in the out-of-pocket contribution for the company, but it will produce higher contribution levels. In turn, this will foster increased retirement readiness among employees.
6. Commit to ongoing measurement.
Organizations cannot manage what they don’t measure. This saying rings true when it comes to tracking improvements and progress by participants in the retirement plan. Every employer is different; every workforce has its own characteristics and challenges. As you help employees get on the path to a comfortable retirement, track your progress. Some campaigns or ideas will be highly successful; others will not. Measure the results so that successes can be repeated and failures can be learned from.
At a minimum, track these metrics by age group:
• Participation rates.
• Average salary deferrals.
• Average account balances.
• Investment diversification.
This prudent process will help the company and its employees chart a more successful path toward retirement readiness.
Without the income provided by defined benefit pension plans to fall back on, today’s employees face the challenging task of saving enough money independently and proactively to provide a steady stream of income in retirement. Challenges in the economy, financial markets and job markets only make this task more difficult. While employers are not responsible for the finances of their employees, financially confident employees will be less stressed and more productive.
When employees are able to retire at a normal age, the organization will save money on health care costs, workers’ compensation and salaries. If the company develops a reputation for helping employees transition to retirement, it could even become an employer of choice in its industry and region. In all, creating an environment that encourages retirement readiness is a win-win proposition.
Rick Unser is an ERISA Risk Management Consultant at Lockton. He works with the investment committees of qualified retirement plan sponsors to maximize fiduciary protection, streamline plan operations and improve employee retirement readiness.
(Securities offered through Lockton Financial Advisors, LLC, a registered broker-dealer and member of FINRA, SIPC. Investment advisory services offered through Lockton Investment Advisors, LLC, an SEC-registered investment advisor. For California, Lockton Financial Advisors, LLC, d.b.a. Lockton Insurance Services, LLC, license number 0G13569.)
Report: Driving Improved Savings Behaviors, SHRM Online Benefits Discipline, October 2011
Retirement Preparedness: the ‘New Normal,’ SHRM Online Benefits Discipline, September 2011
Retirement Education Isn't Enough, SHRM Online Benefits Discipline, June 2011
SHRM Online Benefits Discipline
SHRM Online Retirement Plans Resource Page