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How to guide employees along the right path for their 401(k)s.
Even the longest journey must begin with a single step, according to an ancient Chinese proverb. Unfortunately, however, a difficult expedition may include some steps backward, as many people recently discovered in their travels toward retirement.
When the recession hit in 2008, contributing to a 401(k) became a lower priority for people seeking short-term financial relief. "Participation in our 401(k) plan dropped dramatically during the recession as people cut back," says Forrest Cook, vice president of HR at NCP Solutions, a printing company with 350 employees in Birmingham, Ala.
Fast-forward five years, and many of those employees are still struggling. "They are just now starting to get back into the plan, but they are not contributing at the same level," Cook says.
In addition, more people are now viewing their 401(k) assets as a financial tool rather than a long-term nest egg. They are taking loans or making penalty-free withdrawals to purchase homes, for example. Instead of being seen by plan participants as a sacred cow, the 401(k) "has become a ‘cheap’ source for money," according to Cook.
With health insurance premiums increasing, he is concerned that retirement savings will continue to take a back seat to more-pressing financial priorities for many people. "Employees may be thinking, ‘I need to cut over here to pay my premiums, and maybe I will catch up later with my retirement plan,’ " he says.
This is not a unique situation. Over the past few years, there has been more than enough financial anxiety to go around. In addition to hampering employee productivity, that stress can prevent employees from thinking about the future. A growing number of employees may be sacrificing their ability to retire when they want to or when their health necessitates it.
The Retirement Landscape
Knowing when you are financially ready for retirement is not as clear-cut as it used to be. In the past, employees participating in a traditional defined benefit pension plan would know exactly how much lifetime retirement income they would have well before they made the decision to retire. Now, however, a 401(k) or other defined contribution plan is the main retirement vehicle for most employees, and that means they—and their employers—must take a more hands-on approach.
The decline of the traditional defined benefit pension plan has been rapid and steep since 1979, but enrollment in defined contribution plans, including 401(k)s, has increased significantly. According to data compiled by the Employee Benefit Research Institute (EBRI), 62 percent of private-sector employees with access to a retirement plan participated only in a defined benefit pension plan in 1979, while 16 percent took part in a defined contribution plan alone, and 22 percent participated in both. By 2011, the last year for which EBRI tracked data, those numbers had flipped, with only 7 percent enrolled solely in a defined benefit plan and 69 percent taking part in a defined contribution plan. The percentage of employees participating in both has remained steady.
This shift in retirement vehicles means that an employer offering only a 401(k) plan may need to make concerted efforts to ensure that employees feel comfortable retiring. Although employees are counting on their employers for help, only a third believe that their company offers sufficient guidance to transition into retirement, according to a Bank of America Merrill Lynch survey of 1,014 employees released in June 2013.
Helping to ensure retirement readiness is not purely altruistic on employers’ part. "Employers need to know that employees can retire when the time comes so that employees underneath them can develop and take on those roles," explains Eileen Timmins, executive vice president of human resources at Allston Trading, a Chicago-based financial services firm with about 250 employees.
In addition, "employees who delay retirement for financial reasons may not be as engaged," says Robyn Credico, national defined contribution practice leader at Towers Watson in Washington, D.C. "Those employees are not staying on the job because they want to work but because they have no other choice."
Having a motivated and productive workforce is essential to remaining competitive in the global economy. "If some employees are on the job simply because they cannot afford to retire, that is going to impact employers’ bottom line," says Bill McClain, a principal at Mercer in Seattle.
Health is another issue. Some older workers may have or may develop health problems that limit their ability to perform at a high level. That, in turn, creates concerns about rising health care costs, as these older employees remain enrolled in the employer’s health plan.
Like employees, employers have competing priorities, such as a rapidly changing health benefits landscape, that often result in retirement plans taking a back seat. But such an approach may be shortsighted. "You have to pay attention to it now," Credico says. "By the time some people want to retire and can’t, it is too late."
Many individuals mistakenly assume that the benefits they will receive through Social Security will be enough to see them through their retirement years. The best way to give employees a clear picture is to provide tools that create an estimate based on each person’s age and earning history.
Although the U.S. Social Security Administration (SSA) no longer mails annual statements, people can go online to find out their projected benefits. Employers looking for a low-cost way to start a conversation about retirement readiness can use these free tools. Several calculators are available:
The question, then, is this: How can employers help ensure that their employees’ financial preparations are in sync with their emotional readiness for retirement? That’s a tall order, according to HR and benefits executives. "Most employers now realize that people don’t take full advantage of the retirement plan and they don’t make good decisions" about retirement planning, McClain says. "In fact, for the most part, they do not make any decisions at all."
In the past, employers gauged the success of a 401(k) based on participation and contribution levels. While those statistics remain important, retirement readiness is affected by other behavior as well, such as employees’ ability to set specific goals, make informed investment decisions and make periodic adjustments to keep retirement savings on track.
Automatic plan features—including automated enrollment, the escalation of contributions at specific intervals and carefully chosen default investments—are a good start. However, implementing those features alone is unlikely to be enough to ensure broad retirement readiness.
"Employers should use a fully automated savings program that enrolls employees, sets a retirement target and has a contribution strategy," says Sandra Pappa, a principal at Buck Consultants in Pittsburgh. The ultimate goal, she says, is to generate a retirement "paycheck" by helping employees target specific savings levels based on their pay, age and savings to date. Periodic reviews would allow employees to adjust their contributions as needed and generally monitor their progress.
"While employees don’t necessarily have the knowledge, time and/or motivation to do the planning and execution, this approach can ensure that they never veer too far off the path to retirement security," Pappa says.
Another element is helping employees make the most of the assets that are already in the plan. After all, most employers are hard-pressed to increase their contribution levels, and employees may not be able to contribute more on their own. By focusing on factors such as where retirement assets are invested, the investment fees charged, and whether those assets are "leaking" out of the plan through hardship withdrawals or plan loans, employers can help employees optimize retirement savings. For example, plan loans can be particularly problematic when an employee leaves the organization with an outstanding loan balance. If the employee does not have the funds to repay the loan in full, it becomes a withdrawal with all of the associated taxes and penalties.
"Make sure your plan is functioning optimally in all these different areas, because no one can afford to have suboptimal performance," McClain says. "We also don’t have the luxury of just pumping more money into these plans, so we need to make sure that each aspect is operating efficiently." For example, it is a good idea to benchmark fees periodically and see what is available in the marketplace. "Fee levels can have a tremendous impact on investment returns," he says.
The Big Picture
In addition to helping employees maximize their assets, it is important to identify those who need help getting on track. "Defined contribution plans are not one-size-fits-all, so you cannot make decisions based on the average savings rate or average participation rate," Credico says. "It is more about diagnosing and assessing problems, followed by communication on topics like the impact of taking loans and the need to maximize the match that is focused on the people with that issue."
Retirement plan vendors are also increasingly providing tools that show employees whether they are on track to retire with their desired level of income based on their current assets. If any of the employee’s assumptions, such as the age of retirement or desired income, do not work given the current savings levels and investment choices, these tools can identify changes and adjustments that can help bring the employee closer to achieving his or her goals.
However, such projections can be overly simplistic because they are limited to 401(k) plan assets. "We can look at retirement plan balances, but readiness is such an individual thing," Cook says. "Even if I have an account balance in front of me, how can I say this person is more ready than that person? The retirement plan is just one piece of the puzzle."
That is why Timmins recommends offering employees multifaceted retirement planning tools that allow them to factor in other assets they or their spouse may have—such as retirement plan assets from past employers, individual retirement accounts (IRAs), and other savings and investments, as well as expected Social Security payments—when assessing retirement readiness. In addition, she runs periodic reports to identify employees who may need more help, such as those who are not participating in the 401(k) or who have a large percentage of their assets in low-risk/low-return investments such as money market funds.
The goal is to communicate with those employees directly to offer education about the plan, its features and other options. For example, such communication might include letting employees over age 50 know about additional catch-up contributions they can make. Younger employees may respond well to information about maximizing matching contributions. "Reaching out to people individually is more effective than some sort of mass communication," Timmins says. "We do this about twice a year."
Finally, it is important to consider employees’ options for turning their accumulated assets into income after retirement. This is perhaps the most important part of the equation and a key reason why a small but growing number of employers are considering offering an annuity purchase option, either as an ongoing investment option or when participants reach retirement.
Experts recommend the following actions to help ensure employees’ retirement readiness:
Keeping in Touch
For other employers, continual communication is critical. "One of our key strategies is providing as many reminders as we can," says Don Cervantes, director of benefits for VCA Antech, a Los Angeles-based chain of about 600 animal hospitals with 16,000 employees. "Required notices are an opportunity to send something with simple reminders, like ‘When was the last time you looked at how your assets are invested?’ or information about new features."
Cervantes customizes these messages by group. For example, employees in their 20s might get information on the long-term value of an early start to savings. Older, higher-paid employees might get messages that emphasize pretax savings. "For the middle group, we slice and dice the demographics quarterly and review the average savings rates and percentage of this population participating in the plan by different groups," he says. "We look for anomalies using vendor benchmarking data and target communications where necessary." In some cases, this focuses on basic financial education, including balancing a checkbook and avoiding credit card debt.
Joe Schoener, president of Insurance Partners Group Ltd., an insurance agency in Worthington, Ohio, suggests emphasizing one key message to employees: Retirement will get here faster than they think. "If they cannot do anything else, they should at least try to contribute enough to earn the match," he says.
In some cases, just asking employees about their retirement savings could get some to act. "Employers need to ask, ‘How are you doing over there? Do you need help?’ " advises Jason Gasdick, senior vice president of mobile talent for WorldOne, a health care data company with about 150 U.S. employees based in New York City.
Helping employees retire on their terms is a noble but difficult goal. Despite an employer’s best efforts, not everyone will do what is necessary to secure his or her retirement. "You can’t force people to plan for retirement," Timmins says.
But you can lay out a path that makes it easier for them to take the right steps.
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