Do you know if your retirement plan has your employees on track to a dignified retirement? If not, it may cost you a bundle according to the Wellness Council of Indiana, a wholly-owned subsidiary of the Indiana Chamber of Commerce. I think names like 401(k), fiduciary and profit-sharing have taken our eye off the ball of dignified retirement.
Your retirement plan may cost you more than you think
Liz Davidson highlighted some of the costs in BenefitsPro in 2011. She highlighted that employees who cannot retire have significantly higher healthcare costs on average. On average employee who delays retirement cost the employer on the low side $10,000 a year.
Just because an employee is on the payroll it does not mean their productive employee. Typically, employees that are holding on have greater absenteeism and lower productivity. This could lead to lower morale from the other employees who may grow weary of taking up the slack.
Stephen Miller talked about this in 2014 in “When Workers Won’t Retire, Workforce Challenges Arise”, Society for Human Resource Management. Companies can face unintended consequences when retirement-eligible employees remain in place. One of those consequences is declines in performance among younger employees who are unable to move up the career ladder, which causes lower morale and decreased motivation. This can simply drain talent if they seek greener pastures.
Rethinking why you have a retirement plan
Many companies offer their 401(k) plan not as a retirement plan but a benefit deemed necessary to offer in war for talent. Historically many large employers decided to stop providing their employees a defined benefit pension plan. They saw the defined contribution pension plan as a way to get out of the liability of actually delivering a monthly benefit to their employees. Companies had actuaries, investment professionals in charge of delivering investment returns based on the actuary’s calculations.
Eventually employers who had not offered pensions saw the 401(k) as a way for them to provide a similar benefit to their employees. Still today, some companies refer to their plan as a supplemental retirement plan. This suggests the plan is optional, not representing the bulk of an employee’s retirement income. Some companies added alone feature because they felt it would make the retirement plan change more palatable to employees. Unfortunately, that turned the plan into a bank account some employees who used it for short-term needs. Note that the predecessors, Social Security and the defined benefit pension did not offer these features.
Steps to take to focus your retirement plan on delivering a dignified retirement
The Save More Tomorrow program developed by Shlomo Benartzi provides a blueprint for nudging your employees today to better prepare for retirement. It involves actions like automatically enrolling them (or re-enrolling them), automatically increasing their savings rates and opting them into professionally managed investment portfolios. Research by Roger Ibbotson and Jack VanDerhei make it clear that most people need to save at least 6% of compensation per year in order to live on 80% of their current income. Depending upon the person, the rate may be 100% of compensation. Yes, I know 100% sounds ridiculous, but it is the truth if an employee has had no savings and is facing retirement tomorrow. That’s why saving early and often is so critical. Savings rates increase for higher income workers and for women to longevity expectations. That’s why it’s important to tailor the defaults to your demographics.
As an employer you can start by using some of the defaults Benartzi highlights. I recommend working with a CERTIFIED FINANCIAL PLANNER™ professional, familiar with the Save More Tomorrow program that is a 401(k) retirement plan consultant. (I believe you should work with one that will be an investment fiduciary to your plan).
Because one size does not fit all, a valuable additional step would be to provide, not just offer, one-on-one counseling to all of your employees. Each employee should be engaged to the use of a personalized analysis (gap analysis) to show them where they stand. This will help to overcome the ostrich effect that some employees have. Keep in mind that the topic of money, especially retirement, is an emotional one. People don’t often do what is in their rational best interest because of emotional reasons.
This gap analysis along with one-on-one counseling can guide how the defaults should be fine-tuned:
- Increasing or decreasing their savings rate
- Fine tuning their retirement date (hopefully sooner than later)
- Tweaking their target asset allocation (expected return)
During these counseling session, some of employees will open up to the financial counselor what’s holding their participation back. The counselor can help customize a plan to help them overcome these obstacles. Addressing these things sooner than later will help you create happy retirements and help you avoid the costs and consequences of employees fighting retirement.
Is the question of cost holding you back? Many of these recommendations can be implemented at little or no cost to the employer. The larger issue is the looming higher costs of employees who cannot retire and the loss of talent because of their inability to get promoted. Ready to evaluate your current employee services? Contact us.
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. The advisor is providing educational services only and is not able to provide participants with investment advice specific to their particular needs. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material
“National Savings Rate Guidelines for Individuals”, Journal of Financial Planning, April. Ibbotson, Roger, and James Xiong, Robert P. Kreitler, Charles F. Kreitler; Peng Chen. 2007.
How Much Needs to be Saved for Retirement After Factoring in Post-Retirement Risks: Evidence from the EBRI Retirement Security Projection Model. Jack VanDerhei, Ph.D., Employee Benefit Research Institute, March 2015 • Vol. 36, No. 3
