Retirement Programs Keep Employers On Track
There are many reasons for companies to offer a robust employee retirement savings program—it’s good for recruitment, for retention and for the future well-being of employees.
But what a firm provides, how it's structured and how the options are communicated to workers depends on the company's business strategies.
Firms with high turnover and lower-paying positions, for instance, might not be as aggressive as companies in more competitive industries or ones that are looking to retire employees at eligibility to make room for a new generation, according to Alison Borland, vice president of retirement strategy and product development at Aon Hewitt.
For companies that are looking to ensure their employees are prepared for retirement, it requires more than handing over a brochure explaining 401(k) plans and paperwork for their signature.
There are two things HR directors can do to give their employees their best shot at retirement readiness—offer a 401(k) plan with auto-enrollment and auto-escalation features, and develop a comprehensive, hire-to-retire program for financial literacy.
Both are sorely needed, according to a 2012 Deloitte survey of 430 plan sponsors, 84 percent said that only some or a very few employees would be financially prepared to retire.
Given what workers are up against—personal debt, rising healthcare costs, lack of personal savings—it’s not surprising. Most retirement programs aren’t making enough of a dent, but experts point to certain changes that can make a big difference.
Go on auto, but raise the default rate
Auto-enrollment is a great start to getting employees into savings mode, and 56 percent of 401k plans now feature it, according to the Deloitte study. And on one level, they’ve been highly successful.
Participation is around 90 percent, compared to 70 percent with traditional ones, according to pension and retirement expert Robert Clark, a professor at Poole College of Management at North Carolina State University.
"Traditional 401(k) plans leave workers out unless they choose to be in. They also specify the rate of contribution and where to put the money,” says Clark. With auto-enrollment, employers take charge—automatically enrolling new hires, setting the rate of contribution, and putting the money into a specified account.
"The money stays there until the employee chooses to move it,” says Clark. “Basically, you’re in, and you have to opt out.”
The problem comes when the contribution rate is too low. At the typical default rate of 3 percent, auto-employment doesn’t make enough of a difference. Employees need to save 11 percent to 15 percent a year in order to replace 80 percent of their income after retirement, but when they start off low, they tend to stay there, according to Aon Hewitt's Borland.
“When the automatic approach gets them on the track, they stay on that track, and they don’t save enough,” Borland says.
Companies need to set much higher default rates of 6 percent or 8 percent, and match at those levels, says Borland. And to reach the ultimate goal of at least 11 percent, they’ve got to escalate the rate by 1 percent a year. Auto-escalation combats the inertia employees have when it comes to raising their rate of savings, say analysts.
Another way to grow savings at a healthy rate is to make the default account a target-date fund, rather than a money market fund, according to Clark.
“This tracks the typical advice given by financial advisors to move from aggressive investments to less risky ones as you age,” Clark says. "You start out with 80 percent in equities, which declines to 30 percent to 40 percent and the rest goes into safer investments like bonds."
Promote financial literacy—early
You can automatically enroll and escalate, but without the buy-in and involvement of employees, your plan will never be as effective as it could—or should be—according to Luke Vandermillen, vice president, retirement and investor services, at the Principal Financial Group. “It starts with the fact that most people haven’t taken the time to calculate how much they need to be saving for retirement,” he says.
The most successful education and communications programs offer simple ways for employees to understand and act on opportunities. Interactive websites, smartphone apps, and text-messaging all make the process more accessible—particularly to younger employees, who are less likely to participate in workshops or respond to phone prompts.
“You want to start automating as many features as possible to make it easy for employees to start at an early age,” says Vandermillen. “One-on-one meetings also generate better results.”
The fact that companies often wait until employees are nearing retirement eligibility to start education programs is another big problem; by then, it’s too late to accumulate the savings necessary to cover income.
“Companies should be pointing young workers in the right direction, even to the point of how to pick a financial planner," says Carl Van Horn, an expert on human resources and employment issues, and director of the John J. Heldrich Center for Workforce Development at Rutgers University.
Fears of fiduciary responsibility—being responsible and possibly liable for decisions— have long kept employers out of the business of offering financial advice, but that’s been slowly changing, with 39 percent of companies offering some level of guidance, according to Borland.
New Labor Department regulations may also ease the constraints of fiduciary responsibility—paving the way for companies to bring in outside financial planners to advise employees on investment strategies.
Meanwhile, advisors can explain the options and issues in general terms. Instituting monthly financial-education meetings is ideal, according to Bill Chetney, executive vice president of LPL Financial Retirement Partners in San Diego, which trains retirement advisors.
“It creates a kind of worksite financial-literacy program for people to participate in over the years," Chetney says. "It doesn’t start five years before retirement … it happens in little bites over decades.”
And can keep both employees — and employers — on track.