Recently I was talking with a human resources vice president who made the comment that no one seems to want to retire. Many employees are afraid they do not have enough money to retire. Some may be right and some, may be wrong. As you likely know, older workers tend to drive up health care costs and cost more than younger workers. What can you do?
Today, many 401(k) plans provide employees access to a plan without access to targeted advice. Some plan providers offer access to plan and investment education. No employee receives a pass-fail grade or a designation in retirement income planning. Some providers out there primarily provide only access to web-based calculators. However, just like in the Wizard of Oz, who was behind the curtain? Who was validating the assumptions behind the retirement planning outputs?
Most of the presentations that I have seen or attended focus on investing and not saving. The advice most employees need is how much they should be saving. It is savings more so, than investment returns that will help people create a stream of income for retirement. The needs of the lower compensated employees typically are different than the needs of the higher compensated employees.
One of the factors is the amount of income Social Security will provide. There is often confusion and misinformation for both low and highly compensated workers. Workers claim early permanently reducing a potentially higher income than what would’ve been available to them. Many highly compensated employees see reaching the Social Security tax phaseout as extra money to spend today. Most need to see this as money that needs to be invested to create the additional retirement income their high compensation status suggests.
Help provide them retirement advice
In my experience most low and highly compensated employees have little retirement income literacy regarding Social Security, annuities, pensions and 401(k). The traditional one size fits all 401(k) often doesn’t work as a supplement to income sources that are not understood.
When companies provide a pension, they are essentially telling their employees how much to save and then managing that savings to create retirement income. I am not saying you need to create or sponsor a pension for your employees. However, what if you offered the same advice that actuaries give employers but give it directly to the employee. For example, let’s say that you a sponsor a 401(k) or ERISA 403(b). You can provide as part of the program 1-on-1 retirement planning advice. In order to be advice, you must use a provider who will work as a fiduciary 401(k) advisor for plan participants. There are several options this may be provided which will vary based upon provider.
A 401(k) with the equivalent of a pension actuary
These services can simply be included in your 401(k) plan and do not necessarily require additional expense. Second, the sooner your employees can get themselves on track to the sooner they benefit from tax advantaged savings and the compounding of returns. You likely have done calculations that shows you how much it costs as workers age on your bottom line employee costs. Third, employees with funded retirements will likely retire, decreasing your human resource costs when replaced with younger workers.
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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.