The State of Retirement Saving in America and How to Fix It
For many Americans, retirement savings can feel like the proverbial carrot dangling barely out of reach. Perhaps they need aid from their employers, or they don't contribute to a retirement plan because they need help understanding delayed gratification, or the power of compound interest. Helping your employees understand the importance of retirement savings, and providing them the tools to achieve their retirement goals, may give your organization an edge in a world lacking in-depth financial literacy.
The State of Retirement Planning
PLANSPONSOR, a trusted resource for information about retirement benefits, recently released a survey detailing the state of retirement for Americans in 2015. PLANSPONSOR's survey questioned 1,077 full-time employed adults about their retirement savings habits and outlook. The results provide strong signals that employees value corporate help with their retirement savings.
65 percent of respondents with a retirement plan available to them contribute to their 401(k) or other defined retirement plan. Out of all respondents that have retirement plans, only 11 percent have consciously chosen not to participate in the program offered to them, and 20 percent of respondents work for an organization that doesn't offer a plan at all.
This means that nearly one-third of the survey participants may not have the support or financial education to help them with the retirement process. Perhaps more surprising, only 55 percent of survey respondents have set retirement goals, meaning there is a huge opportunity for employers to help their employees understand the importance of retirement planning.
Time magazine recently wrote a piece called "The Real Reasons Americans Aren't Saving Enough For Retirement". The article looks into another retirement survey conducted by TransAmerica Center. A key takeaway from the piece is that "many workers simply don't understand what it will take to meet their [retirement] goals. More than half [of the TransAmerica survey respondents] (53 percent) say they "guessed" when asked how they estimated how much they need to save for retirement. Two-thirds acknowledged they don't know as much as they should about retirement investment. And just 27 percent say saving for retirement is their greatest financial priority, only slightly more than "just getting by" (21 percent) and "paying off debt" (20 percent).
This lack of understanding of retirement planning is leading to a lack of confidence about retirement in general. In PLANSPONSOR's survey, employees were asked whether or not they will have reached their retirement goals by age 65, the results were somewhat disheartening. Only 15 percent of all respondents indicated that they were very confident they would be able to accomplish the goals they've set for themselves by age 65, compared with 25 percent who said they were "somewhat confident".
Ways to Improve Retirement for Your Employees
1. Offer your employees a 401(k) plan. The Transamerica survey showed that just 66 percent of workers were offered an employer retirement plan in 2015, and both surveys make it clear that employees want and need them.
Imagine this situation: what if you cut down on attrition because you're offering a 401(k) plan? Offering a plan doesn't cost very much for an organization, in fact it could save you money in the long run. Forbes recently wrote on the benefits of companies offering 401(k) plans to their employees, "If employers would really calculate in a systematic way how much turnover costs to them, they would pay more attention to clever ways of compensating workers, like adding a 401(k) account to their benefits".
Calculate what that means to you. If you could retain your top-notch employees because of a retirement plan, what would that mean for your bottom-line?
2. Assign a brief homework assignment: have your employees conduct a retirement projection. How much is currently in your employees' 401(k)s? With current compound interest rates, what will they have saved by the age they'd like to retire? What would happen if they contributed just 2 percent more each year? And more importantly, what does their savings mean for their lifestyle? Will they be able to spend the same amount each month as they currently do? Using a retirement calculator is a great way to visualize retirement savings. Many employees are disconnected from the power of compound interest. By providing a visual, the inspiration to take advantage of a retirement plan will be powerful. The TransAmerica study showed that 44% of their participants feared they would outlive their retirement savings. By helping your employees understand how much they are currently saving, and giving them an idea of how that breaks down into monthly expenditures will help them see if their projection will allow them to sustain their current lifestyle and spending habits.
3. Set up automatic enrollment and automatic increases. For employees, often the hardest step in retirement planning is the first one. The assumption that they can't afford to contribute, or just the idea of the paperwork, gets in the way of enrollment. Employers can take the reins and ensure their employees are taking advantage of their 401(k), strategically. A 401(k) automatic enrollment feature allows employers to enroll or re-enroll eligible employees in their company's plan at a pre-determined initial level, often 3-6%, and investment option. Automatic increases help boost retirement readiness. This feature increases the percentage of participant contributions each year until a maximum is reached. There is no action required by employees, unless they choose to opt out or change investment choices. Opt out rates are much lower than you might expect, usually in the 5-10% range.
4. Be a trustworthy resource for your employees. Most participants of the PLANSPONSOR survey specified they had a hard time trusting anyone when it comes to speaking about their retirement. The most trusted sources appear to be financial advisers/planners and retirement plan service providers. Understanding this trust issue is a huge gap in the marketplace and becomes an opportunity for business owners — Can you provide an environment where your employees feel mutual trust when asking about their retirement plans?
Understanding the landscape of retirement planning in America is a first step in understanding how you can help your employees get ahead for retirement. If you are considering offering a 401(k) to your employees, or any of the other steps we've covered, there are an abundance of resources available right here on Paychex.com to get you started. Your employees will likely be grateful for your foresight.