Effective ways organizations can encourage employees to bank for retirement.
By Jamie McInnes
Many Americans are working longer since they don’t have the financial security to retire as early as anticipated, finds a Gallup poll. There are several implications that come along with an aging workforce that can impact a company’s bottom line. More experienced and tenured workers require higher compensation costs. Plus, when an older employee choses not to retire, younger workers can’t transition into more senior roles. This may cause turnover since those top-performing younger candidates will seek employment elsewhere. All of these factors can impede promoting an inclusive and growth- oriented company culture.
Unfortunately, Bankrate finds that 14 percent Americans are saving less for retirement at a time when employer-sponsored defined benefit (DB) plans are waning as longevity and retiree expenses, particularly healthcare costs in retirement, continue to increase. Employees need to save early and industry leaders need to find a better way to connect with them to help them understand and simplify their choices.
The retirement industry has tried to address these growing issues for years through a number of new products and plan design features. These include:
- Auto enrollment: This feature in a retirement plan allows an employer to enroll an eligible employee in the employer’s plan unless the employee elects otherwise.
- Auto escalation: This feature in a retirement plan requires participants to make a commitment to automatically raise their savings rate annually.
- Guaranteed income products: Often referred to as an annuity, it is a product where, for an initial investment, an individual receives a guaranteed income stream for the remainder of his or her life.
- Innovative match formulas: For employees to receive a contribution from their employer, the employee must contribute a specified percentage into a 401(k) plan. The employer will then match that contribution to the retirement plan being offered.
Using automatic plan features can help increase savings, plan participation rates, and overall outcomes. For example, auto- escalation allows employees to steadily increase their savings rate each year. In many cases, these products have made a difference, but employees need access to better engagement tools. Plans that offer customized assistance about issues, like how much to invest and allocate to different investment classes, are highly valued by many of today’s overwhelmed participants.
Organizations should also consider tying business goals with participation. For example, if a company is looking to increase retention and longer tenure, it can leverage a tiered match approach. Longer-term employees would receive a greater retirement savings match. If it gradually increases, employees will be encouraged to stay with their organization.
Technology is also allowing organizations to find new ways to reach people. Advisors and providers are embracing new ways, like online videos, quizzes, and interactive activities, to inspire participants to take action based on emotional and rational techniques. Momentum toward mobile access is providing a faster, more convenient experience. Providers have created apps for both mobile and tablet devices, along with intuitive websites, to engage employees and educate them about their retirement needs.
Behavioral science research shows that when people internalize the reasons for which they pursue a goal, and start acting to achieve values for their own sake and right, they are more likely motivated to save. On the other hand, people who feel overwhelmed or intimidated by retirement plans are less likely to plan for their financial future.
The long-term financial well-being of American workers needs to be a critical component for organizations, plan sponsors, and advisors. American workers deserve to have the confidence that a secure retirement is achievable.
Jamie McInnes is senior vice president and head of the total retirement solutions within Prudential Retirement.