Retirement Readiness Today
When considering retirement readiness, there are a great number of articles, arguments and entreaties for personal responsibility and individual engagement. Fidelity’s TV ads feature a green line that represents a financial GPS towards a healthy retirement. Voya TV ads ask, “What’s your number?”, while showing individuals holding computer-graphic numbers that represent how much they’ll need in retirement.
Despite the seemingly constant reminders, the research is consistent and overwhelming: Americans are not sufficiently prepared for retirement. Recent evidence highlighting this fact includes a study from the Employee Benefit Research Institute that shows the majority of us have less than $25,000 saved for retirement. Depending on the survey, somewhere between 25% and 36% of U.S. employees have saved nothing – zero – for retirement, and a substantial number of retirees expect to count exclusively on Social Security.
It is a well-known problem, with both individuals and government efforts (including the recent MyRA program) thing to remedy it. But can employers do more to address it?
Why should businesses care about retirement readiness?
While the impact of insufficient retirement savings for an individual is obvious, it is important to realize that their employer will suffer as well. We’ve considered the legal responsibilities of promoting retirement readiness before (in our April 2013 edition of Confero), but we shouldn’t forget there are financial and pragmatic reasons to encourage healthy employee retirement.
First, a study from Human Resources Executive Online suggests that employees undergoing financial stress tend to be more distracted and less productive, so promoting employee financial well-being is directly helpful to the employer. Second, there is solid demographic evidence that Baby Boomers are delaying retirement as a result of the 2008 financial crisis. Employees who aren’t ready for retirement will stay in their positions longer, possibly to a point where their productivity begins to decline. A rotating workforce encourages a healthy balance of experienced veterans and new hires, with the potential to create loyal, long-standing relationships with the company. Finally, older, tenured employees tend to be highly compensated, relatively immune from performance criticisms, and less likely to adapt to changing requirements. In a world of pure economic theory, employee salaries should be perfectly correlated with their productivity. In reality, the longer an employee stays at a job, the more they tend to earn. In most cases, salaries don’t fall even if employee productivity drops.
While the responsibility for retirement readiness is primarily laid at the feet of individual employees, their employers will bear some of the consequences. Therefore, we must recommend a more aggressive stance on the part of employers – a full-court press – to promote retirement readiness.
So what can businesses do to improve retirement readiness?
Retirement is still ultimately the responsibility of individuals, but there are a number of systematic incentives and plan structures that employers can put in place to promote retirement readiness. At Westminster Consulting, we’ve suggested several possibilities in our articles, blog posts, and through Confero. As a reminder, here are some ideas to consider.
- Reboot your retirement plan: Simplifying your investment lineup, harmonizing reporting from multiple plans (e.g. – your DB pension plan, DC plan, and other benefit plans), and improving your service agreements for participants can all have a positive effect. Making sure your service level agreements are competitive is a requirement and, generally, a good idea.
- Convert your DC plan into a DB income-replacement structure. See our September 2012 article on this topic or our April 2013 edition of Confero for more details.
- Adjusting your DC plan structure, using QDIAs, automatic features like auto-deferral and auto-escalate, measuring the impact of company matching towards participation rates. For more information, the July 2014 edition of Confero is all about automatic features for improving plan performance.
- Formalize and monitor your participant education policy. The January 2014 and September 2015 editions of Confero had several articles about improving the participant experience, particularly in regards to education.
- Make participation rates a key metric for retaining your service providers.
Not all of these actions will apply to your company’s unique circumstances, but your consultant can suggest the actions with greatest chance of success.