The following is a guest post from Rick Unser, an ERISA Risk Management Consultant with Lockton Financial Advisers.
After the most recent financial crisis and recession have taken a bite out of many nest eggs, delaying retirement has become a harsh reality for many. According to a recent survey by the Employee Benefits and Research Institute (EBRI), the poor economy and weak financial markets have caused a 41 percent increase of workers 55 and older who expect to retire beyond age 65, more than double from 2001. In addition, there has been a three-fold increase in the number of workers who are “not at all” confident that they will live comfortably through retirement. Seventy percent of workers are “not too or not at all confident” that Social Security and Medicare will provide benefits of at least equal value to what retirees receive today.
Are You Prepared To Pay The Price?
This lack of confidence in the workforce, which will result in more employees working into their 60s and even 70s, might not seem significant on the surface. However, scratch the surface and you will discover significant costs to employers when people cannot afford to retire at the normal retirement age. Consider the cost of healthcare. Healthcare costs for employees over the age of 65 are more than double that of employees aged 45-55. While the statistical rate of work-related accidents does not increase dramatically for employees over age 65, incidents that do occur are more severe and paid time away from work is typically longer which raises cost (i). Salaries and other compensation tend to be higher for an older employee with tenure than for a younger employee with a similar skill set. Finally, productivity (which varies greatly among each individual) can drop off substantially.
To address these concerns, employers have begun to explore and embrace the concept of “retirement readiness” within their workforce to help their employees retire at or around their normal retirement age(ii). For an employee to be considered “retirement ready” they need to have accumulated a sufficient amount of retirement savings and/or secured other streams of income to replace between two-thirds and seventy five percent of their pre-retirement earnings. Unfortunately, research and practical experience has shown that a majority of employees are not on the right track to replace a sufficient level of their income by their normal retirement date.
When employers create an environment which promotes retirement readiness, they can reduce the costs associated with an aging employee population and deliver a positive message to employees about planning for retirement. While the responsibility to prepare for retirement will still largely rest with employees, employers now have a way to more accurately guide and prepare their employees to enter retirement at or near their normal retirement age.
To develop a “retirement ready” workforce, employers should focus on the following steps:
1. Conduct a Company Retirement Readiness Assessment
When you have an understanding of how different segments of your population are utilizing (or not utilizing) your retirement plan and what their projected outcomes are, it is easier to strategically develop a plan to help improve the retirement readiness of your workforce.
2. Evaluate Plan Design
There are several opportunities within your plan design to help start and keep your employees on the right track towards retirement. The key is understanding your workforce and then making decisions which support both employee retirement readiness and your corporate goals.
3. Develop Targeted Employee Communication Focused on Changing Behaviors
Employees want to be guided. Their retirement readiness can be greatly improved when you communicate in a way they can understand and relate to which will allow them to easily and painlessly arrive at the right decisions.
4. Retirement Income Solutions
Plan level retirement income solutions are a recent entrant to the 401(k) market place. While one can argue about the financial benefits, the psychological benefits of the downside protection for their 401(k) balances can help employees stay the course instead of making emotional financial decisions which will dramatically affect their retirement readiness. At a minimum the pros and cons should be discussed by plan fiduciaries.
5. Be Strategic with Employer Contributions
Studies have shown that many employees will contribute only enough to get the full company match that your formula allows. There are ways to revise your formula with no increase in cost for the company, but will produce higher contribution levels and channel employer dollars to your high value employees which will foster increased retirement readiness amongst your employees.
6. Ongoing Measurement
You cannot manage what you don’t measure. Tracking and measuring your progress will only help your employees and your company chart a more success path towards retirement readiness.
With a more strategic and comprehensive plan to promote retirement readiness, employers can help their employees become more financially confident, resulting in a less stressed and more productive workforce. In addition to cost savings, supporting employees on their journey to a timely retirement demonstrates that you are a caring employer and strengthens your ability to attract higher quality talent.
The six steps listed above are an excerpt from “Six Steps to Get Your Employees “Retirement Ready” in 2012”. To obtain a full copy of the article, visit www.erisariskmanagement.com/readiness. For more information, contact Rick Unser at 213-689-2392.
Rick Unser, AIF, QPFC, CRPS
ERISA Risk Management Consultant
Lockton Financial Advisors, LLC
Securities offered through Lockton Financial Advisors, LLC a registered broker-dealer and member FINRA, SIPC. Investment advisory services offered through Lockton Investment Advisors, LLC, a federally registered investment advisor. For California, Lockton Financial Advisors, LLC, d.b.a. Lockton Insurance Services, LLC, license number 0G13569.
i. Age as a Driver of Frequency and Severity, NCCI, December 2006
ii. Employees' Retirement Readiness Is Employer Priority, SHRM, January 2011