How employers can help their workforces improve retirement outcomes
By Amy Johns
The affect of a workforce unprepared for retirement has far-reaching consequences for both employees and employers. Company-sponsored retirement plans, such as 401(k) plans, have become the main sources of retirement income for employees. As a result, we have seen more employers taking an active role in helping their employees save for retirement. This year, we asked employers what they considered the most important topic within their retirement plan. Helping employees retire with confidence ranked as the top priority for employers. Interestingly, the steps on how to improve employee retirement outcomes were less clear.
Three Retirement-Ready Action Steps
The good news for employers is significant opportunity exists if they know how to optimize their retirement plan. Employers are most successful in helping their workforce retire on time if they design, engage and evaluate.
Make it automatic.
Automatic plan design is one way to improve retirement outcomes. Employees who are automatically enrolled in their company’s retirement plan rarely complain. In fact, seven out of 10 employees favor the use of automatic enrollment.1 The key, though, is to automatically enroll all employees – not just newcomers. It is also important to select a default contribution rate that will help employees save for retirement and automatically increase this contribution amount annually until a meaningful savings rate is reached. Research shows only a small number of employees opt out of automatic enrollment – even when the initial contribution level is set as high as six percent of pay.2
Restructure the match.
The employer match is a key driver of how much employees decide to contribute to their retirement plan. As a result, more employers are restructuring their match to encourage higher savings rates, while maintaining the same out-of-pocket costs for the employer.3 The chart provides some examples of how employers are taking advantage of different matching structures:
Keep it simple.
In the past two decades, the concept of educating employees on retirement planning and investing has shown little to no increase in savings and investing behaviors. The majority of employees lack the financial planning skills, time or interest to make appropriate investment decisions. Providing resources to simplify the investment decision process by offering investment advice has helped reduce these concerns and improved retirement outcomes. A recent study suggests, on average, employees who had help experienced returns nearly three percent higher than employees who did not have help.4
Focus on today.
Cost of living and day-to-day expenses are the primary reasons workers do not save (or do not save more) for retirement.5 Employers can offer meaningful communications that will help employees see a holistic financial picture. Employees who pay off debt, have a budget and know how to save for day-to-day expenses are more likely to be prepared for longer term savings like retirement.
Make it meaningful.
Most companies have a diverse workforce made up of different age groups, compensation levels and financial knowledge. We have found employers who promote retirement savings in ways that relate to the employees’ personal life-stages have higher employee engagement.
Although certain employees will have a substantial amount of wealth outside of the retirement plan, most employees’ personal assets will largely be limited to their home and the investments within their retirement account. Employers can readily evaluate the retirement readiness of their workforce in aggregate by reviewing average account balances, participation and contribution rates. To take this concept a little further: more employers are measuring their employees’ expected income in retirement to determine if their workforce is on track for retirement or if their employees will have a retirement income gap. Employers can use this information to determine how effective their retirement plan is in helping employees retire on time and with confidence.
Moving Toward Retirement Readiness
Companies and their employees benefit from proactive efforts to facilitate employee engagement by helping them understand their retirement programs. Research has proven employers who provide these three steps – design, engage and evaluate – in their retirement plans are more likely to have a retirement-ready workforce able to plan confidently for the future.
- Mathew Greenwald & Associates, & KK & Company (2012). Fourth Annual 2012 DC Participant Experience Study
- Callan Investment Institute (2013). Successfully Implementing Automatic Features
- MFS Funds (2014). MFS Participant Plus, Research Collaborative MFS Study
- Help in DC Plans: 2006 through 2010, AONHewitt, 2011
- Employee Benefit Research Institute (2015). The 2015 Retirement Confidence Survey: Having a Retirement Savings Plan a Key Factor in Americans’Retirement Confidence.
About the Author
Vice President Participant Communications Product Manager BB&T Retirement and Institutional Services