Do you have a one size fits all retirement plan or one that considers the specific needs of your plan demographics? Some might look to the Plan size is a benchmark and others may look to comparisons of average plan balances to similar asset size plans. That fails to consider the actual retirement income needs of the participants. These benchmarks don’t consider the needs of women. Let’s say that your plan has 80% women. If so, it should consider features that have women savings to the levels suggested by research from the Employee Benefit Research Institute1.
Age demographics and women’s retirement
Employees who are younger typically will have lower balances compared to older workers even if they save 10% of salary. Research from Employee Benefit Research Institute by Jack VanDerhei, Ph. D1. He shows that men and women have different savings needs. For a 25-year-old man earning as much as $65,000, an 8.2 percent savings rate equates to a 90% success probability. A 25-year-old female earning as much as $65,000 needs a 9 percent savings rate to achieve a 90% success probability. If that same woman waits to age 55 she would have to save 18.5 percent and would see the success probability drop to 50 percent. That is the blessing and savings curse of a longer life expectancy.
Often women have lower account balances than men even when they make the same income. Why haven’t women accumulated more? Often they have taken time out of the workplace to take care of family. They often focus their energies and money on their children. This often is at the expense of their own retirement. It’s important that they are tracking the retirement accumulation they need at different age milestones.
The average plan balance comparison fallacy
Plan balances are often used to compare plans. Is that the best comparison when focusing on creating adequate balances for a dignified retirement? I know one firm that has a $200,000 plus average balance in their retirement plan. I know another plan that has $150,000 average balance. In isolation, the larger one looks pretty good compared to the other as well to many Americans who have nothing. One of the firms is a large law firm. Based on my expectation of what the average attorney makes, this likely doesn’t fund one year of retirement. In either case will that average balance grow to be the number its employees will need to fund their retirement years? In fact, do these balances represent a few million dollar balances averaged with some thousand dollar balances? Focusing on average account balance comparisons fails to focus on the specific retirement savings balance needed in order to live a dignified retirement.
Women’s retirement readiness benchmarks versus men’s
Women face a different set of retirement challenges than men such as longevity, inconsistent employment due to family care responsibilities, etc. Therefore, it would be wise to manage and monitor their retirement progress separately. Women who have been in and out of the workforce likely need some help in recalibrating their retirement savings need.
Are you using auto enrollment to make sure that all participants are nudged towards being in the plan? Are you using an auto deferral rate? The automatic deferral rate should be based on the majority of the population. You should also consider terminating the loan feature. People get to take loans on their Social Security or pensions? The government assesses a 10% percent early withdrawal penalty and accelerates the taxes on early withdrawals. This should help deter people from not staying focused on the long-term goal of a dignified retirement.
There is no substitute for an individualized approach. This becomes especially true when there’s a lot of income, age, gender, and racial differences in your population. Issues surrounding spouse or no spouse, assume Social Security or not, would be handled on an individualized basis. The customization should come from an advice program or certified financial planner professionals and/or charter retirement planning counselor’s help clients focus on accumulating the balance they need to accumulate for a dignified retirement. These two credentials address both the plan sponsor functions and advising employees on how to use the retirement plan to help them pursue a lifetime of financial well-being.
If you’re working with a specialist retirement plan consultant, they should be able to help you look at your advice and education options. Retirement plan consultants affiliated with LPL Financial have access to Worksite Solutions which offers a unique, comprehensive suite of education and advice services. There are other tools in the marketplace that may be better suited for your employees. Look for retirement plan consultants who specialize employee education and advice to help. This employee questionnaire can help start the conversation. Let me know if you need further guidance.
For Plan Sponsor Use Only – Not for Use with Participants or the General Public This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.
1 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