A silver lining of a challenging economy is increased employee education.
by Jeff Miller
Even in these unprecedented times of financial turmoil, rising health care costs, and tremendous uncertainty about the future of the global economy, saving for retirement remains an important goal for employees. This is the message that outsourcing providers as well as others in our industry should be aware of.
For those of us who provide total benefits outsourcing to organizations, such positive savings behavior among employees indicates that our education strategies, self-service tools, and emphasis on long-term financial planning are connecting with our intended audience.
Despite the current financial turbulence, outsourcers are making strides, partnering with clients in educating workers and affording them the technological means to help them achieve their retirement goals worldwide. But how do we know our efforts are working and that retirement saving remains a top priority for anxious employees?
Survey Results
Fortunately, there’s some good year-on-year research that tells us our key messages are not only getting through but also taking root as well, as shown by the 2008 annual Mercer Workplace Survey. Conducted from May through June of 2008 among 2,204 active 401(k) participants who also take part in their employers’ health plans, the survey shows that the percentage of those who plan to continue contributing to their savings plans at their current rate remains virtually unchanged from the past two years.
Although the latest survey was conducted before the effects of the current recession were being fully felt by participants, it is a strong gauge of the sentiment and intentions of retirement savers in the U.S. workforce. This year it was clear that employee sentiments regarding their retirement had stabilized, offering a bit of comfort in these tumultuous times.
In the 2007 survey, 15 percent of respondents reported that saving for retirement was their biggest financial worry—the same percentage reflected in this year’s survey. Similarly, 71 percent say that saving for retirement remains a major financial objective. That level of commitment has held firm for the past two years after several years of declining commitment fostered by short-term financial needs.
But intentions are one thing, actions another. To see if participants still felt the same way about their retirement savings after the economic downturn, we looked at 1.2 million participants in our own clients’ DC plans to see what types of transactions they conducted during the last six months of 2008. Although approximately 28 percent of these 401(k) participants have seen their account balances drop 30 percent or more through December 2008, relatively few (14 percent) conducted exchanges of any kind. Of those who conducted account transactions, most shifted assets dramatically from equity markets into capital preservation funds.
Not surprisingly, there was also a 59 percent increase in account withdrawal activity in the last two months of 2008, compared with the previous year, along with a steady increase in the number of participants who have reduced their contribution rate to zero. But, again, these transactions were conducted by only a small fraction of overall plan participants, or less than one percent in both cases. If most employees are indeed staying the course, this affirms the commitment to long-term retirement goals over a short-term retreat to higher ground.
Facing the Future
Of course, the financial waters are unpredictable, but even before the current roiling of the global economy, a full 44 percent of Mercer Workplace Survey respondents expected the U.S. economy to be in recession in 2009—twice as many as in the previous year.
Since May of 2004, the Mercer survey has shown a steady decline in every aspect of participants’ expectations for retirement. Fewer participants believe they can live as well as or better than they do now when they retire—a decline of 20 percent over the past four survey years. And the number of participants who think they’ll have enough money to pay for health care in retirement plunged from 53 percent to 39 percent in that same period. These perspectives may be disturbing, but they reflect a sure grip on reality and suggest that employees are exploring how to adjust to the prospects of a more challenging future.
If there’s a real silver lining in these clouded economic times, it may be that the increasing emphasis on employee education—especially in the much-outsourced areas of health and benefit programs—is having the desired impact in terms of improving the employee benefits experience. What this teaches us is that as participants become more anxious about the economy and their ability to build a comfortable retirement, the more vital it becomes to deliver targeted communications and health care education. Such education includes better decision support tools that focus on not only how to invest for retirement but also how to help ensure an adequate income in retirement through, for example, automatic 401(k) enrollment, automatic contribution rate increases, diversification of investments, as well as in-plan annuities to create future income streams.
