An important way that employers can help their workers with retirement is to encourage better savings behaviors. Research suggests that the average baby boomer is about $500,000 short in their retirement savings, and that many workers cannot retire on time because of a lack of adequate savings. Across the board, most plan participants need to boost their savings rates by at least 5-10 percent to meet their future retirement goals.
Research shows that one of the best ways to get participants to save more is to leverage automatic features. A 2010 study by the Employee Benefits Research Institute (EBRI) found that plan options like contribution limit increases, auto-escalation of contributions, and auto-enrollment had dramatic effects on employee retirement savings, particular among non-highly paid workers. Improving savings behavior among lower-paid employees may make it easier for your plan to satisfy non-discrimination testing.
The Pension Protection Act of 2006 (PPA) introduced several safe harbor provisions for implementing auto-enrollment and auto-escalation of contributions. Plan sponsors who wish to seek protection under ERISA 404(c), QDIA, or QACA safe harbor provisions are free to implement auto-enrollment and auto-escalation features, subject to certain limits. Your plan vendor or financial representative can provide guidance on designing enrollment features that help meet your employees’ needs.
A major financial breakdown for many plan participants occurs when they leave a job. Many plan participants, ignorant of the financial consequences, simply cash out their plan instead of transferring or rolling over the money. Vanguard research suggests that three in ten retirement age employees cash out in this manner. These early withdrawals can be very detrimental to participants’ retirement savings and employees frequently regret their decisions in hindsight. Better education and more streamlined rollover options can help avoid critical errors when employees exit.
PROVIDE FINANCIAL EDUCATION & GUIDANCE
Financial literacy also plays an important role in improving savings behaviors. Many plan participants may not understand the importance of setting aside a significant portion of their income for the future. Along with a well-designed retirement plan, education and guidance can help make a big difference to long-term retirement success.
As a plan sponsor, you are in a position to educate your participants and help them make wiser financial choices. Research shows that employees need and want financial education; over 70 percent of respondents to a 2010 survey were not confident in their abilities to make financial decisions. However, most adults are not proactive in seeking to improve their financial knowledge. One of the major reasons cited for this lapse is the perceived complexity of financial issues, and the time involved in getting educated.
Financial education doesn’t just benefit your employees. Research shows that it contributes to your firm’s bottom line by improving morale, reducing financial stress, and increasing employee productivity. A documented education program can also help satisfy your ERISA fiduciary obligations.
In order to help improve your employees’ financial literacy, it’s important not to focus just on the retirement benefits your firm provides, but to also give workers a framework for making better long-term financial decisions.
PROMOTE RISK AWARENESS
Many investors are unaware of the importance of balancing risk and potential investment growth. Research into asset allocation choices among DC plan participants indicates that many investors have an imperfect understanding of portfolio risk and diversification strategies. Even when participants are presented with age-appropriate allocations, many over concentrate in “trendy” investment options or choose allocations that are potentially too risky for their desired time horizon. A TIAA-CREF Institute study found that the median number of changes to portfolio allocation over participants’ lifetimes was zero, meaning that more than half of investors never changed their initial allocations even as their age and financial goals changed over time.
One way for sponsors to address this issue is to review asset allocations among plan participants and look for extreme allocations that suggest a lack of understanding about risk. Targeting these investors with communications about investment risk, the importance of diversification, and steps for addressing these issues may be an effective way to combat the problem.
ENGAGE PARTICIPANTS THROUGH MULTIPLE CHANNELS
Plan sponsors face many challenges when attempting to change employee behavior. Inertia, procrastination, and distrust of markets can all make change difficult. However, better marketing of plan enrollment details, financial education, and regular communications can help increase employee engagement.
Research shows that group meetings, one-on-one sessions, and emails are all successful ways to reach employees. Group meetings give your employees the opportunity to hear from multiple experts, while personal sessions allow them to dig deeper into their personal finances with a representative. Some participants prefer communications that they can review on their own time, such as emails, and online presentations. The bottom line is that firms that engage employees through a variety of channels are likely to see better results.