Improving Employee Retirement Readiness

Recently, the focus of plan sponsors has shifted from reducing plan costs to ensuring plan participants’ retirement readiness and helping them set accurate retirement goals. As a result, the majority of sponsors are working to improve investment menus and change their plan design. Those, however, are only some parts of the overall picture for improving employee retirement readiness.

What retirees are the least prepared for and need the most help with are understanding how long their money will last in retirement, knowing how much they will need when they retire and preparing for the risks inherent to retirement. Here are four key aspects plan sponsors should consider to help plan participants aptly prepare for retirement.

Adding Plan Features

Several plan features have been proven to increase employees’ retirement readiness. These features include:

• Auto-enrollment, auto-escalation and auto re-enrollment. Implementing these automatic features broadly increase plan participation and contribution rates. In addition, these features allow participants to potentially attain the recommended annual contributions necessary to achieve retirement readiness.
• Stretched match. Many employers match a certain percentage up to 6 percent. Stretching that match out over the 10-12 percent necessary to retire incentivizes employees to save more in their retirement accounts.
• Leak prevention. One of the largest threats facing employee retirement readiness is leakage in the form of withdrawals or loans from their retirement accounts. Stricter rules around how and when participants can withdraw money will ensure there are funds for them in retirement.

Increasing Plan Education

Plan participation is already high, although the rate of savings is substantially inadequate. A study by three actuarial associations in 2017 found that about 8 in 10 (80 percent) workers who are offered a 401(k) or a similar retirement plan by their employers have some money invested in the plan. That leaves about 20 percent that can be encouraged to use the plan; and that 20 percent remainder heavily skews young.

While many plan sponsors have already recognized the connection between financial wellness and plan education, a study conducted by the Transamerica Center for Retirement Studies found that the need for retirement information is very specific. Plan sponsors should create targeted educational materials based on the age, gender and income of participants. Ideally, the education would help all participants develop a more comprehensive understanding of how retirement funds work together and how to set a retirement-age goal.

To help participants save more, sponsors should provide benchmark savings rates based on what they will need in retirement. Participants also need to know precisely how much they need for a specific monthly income stream in retirement. Often, they just guess or estimate how much they will need. In the Transamerica study, half of the respondents indicated that they guessed how much they needed in retirement. Twenty-two percent estimated this goal based on their current living expenses, meanwhile, only 10 percent used a retirement calculator.

Keeping Money Invested

Sponsors should aim to increase the rate at which participants are saving and to decrease leakage from retirement accounts over time. Between 2007 and 2017, 30 percent of respondents to a survey had taken a loan or early withdrawal from a 401(k) or similar plan. Loans or withdrawals from retirement plans can keep a participant from having sufficient funds in their retirement savings accounts when they retire.

Working with an Advisor

According to Fidelity, 92 percent of plan sponsors work with a retirement plan advisor. Why? Because advisors can help them improve their plan by finding ways to increase participation, reduce business costs and distribute information. More importantly, advisors can help sponsors identify plan features that result in improved retirement confidence and preparedness, as well as formulate a framework for setting retirement goals for employees so that when retirement comes, they are ready.

If you are ready to consider ways to enhance participation and improve employee retirement readiness, PlanPILOT can help. As an independent Registered Investment Advisor, PlanPILOT is not tied to any investment fund or recordkeeper. We offer clients unbiased advice and assistance to control their retirement plan risks and deliver benefits effectively. Seeking help with these aspects of retirement plan oversight will improve on communication, education, and delivering a more personalized experience for plan participants. Call us today at (312) 973-4911 or email info@planpilot.com.

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