Are you ready for a harsh dose of reality? At their current rate of savings, most of your employees will be unable to retire comfortably and independently at the age of 65.
It’s a good thing that I’m not a politician. If I were, I’d be thrown out of office for telling the truth. At the end of the day, however, the math is unavoidable.
Let’s start with what it actually takes to retire.
According to Fidelity, the average 401(k) balance of a 55-year-old who has been participating in a company plan for at least 10 years is $233,800. Sounds good so far. If that individual is making $60,000 per year and continues to contribute 10 percent of his income to his plan, he’ll retire on-time at about 75 percent of his final year’s salary. Of course this also assumes that Social Security will continue to pay out at its current rate of return (cue the theme music from “Jaws.”)
Will your employees need to work until they’re 102?
Our hypothetical worker won’t need to significantly scale back his lifestyle and spending until the age of 84 — at which point he’s really going to need that Social Security check. By 85, he’ll have run out of 401(k)-saved dollars.
It’s true that the numbers above do not take into account a second family wage earner, inheritance money, or other savings and investments. We also expect that most people will have paid off their mortgages, minimized their travel, and generally reduced their expenses by the time they reach the age of 85.
But still, for purposes of comparison, let’s keep in mind that the individual described above is among the most financially sorted out of employees. He makes pretty good money, saves religiously, and understands the critical importance of his 401(k) plan.
So what about the folks who are only contributing 2 percent or 3 percent of their incomes to a defined contribution plan? Or the 30 percent (on average) of Americans who do not contribute anything at all?
What will happen to these employees when it comes time to retire? Will they be happily pursuing hobbies and playing with their grandchildren? Or will they be grimly clocking in each day unable to stop working until they are 102-years-old?
I realize that this question is a bit dramatic – but it’s intended to get your attention. We know that pensions have gone up in smoke. Major changes are certainly in store for Social Security. And who knows what will happen to the value of housing over time – traditionally the most critical retirement asset in the portfolio of your employees.
So here’s the bottom line: There’s really no time to waste when it comes to helping your employees to (eventually) retire. The longer they go without planning, and the more their financial distress builds, the more your costs — and your headaches — will increase.
6 essentials for your employees’ financial health
It has been well documented that financially distressed employees incur far higher health care costs, are distracted at work, and have much higher rates of absenteeism. A few may even be tempted to find ”alternative” sources of income from amidst your inventory.
So what to do? Following are some of the essential ingredients in crafting a healthy financial relationship with your employees – and helping to insure both their current — and future — financial health:
- Adopt automatic 401(k) enrollment. Since the Pension Protection Act of 2006 became law, more than 20 percent of U.S. companies offering defined contribution plans have adopted this model. It’s been shown to increase 401(k) participation to up to 81 percent of your workforce. It costs you almost nothing – and it reaps rich and immediate rewards.
- Build in the most aggressive annual escalators possible. OK, so this is just my opinion – and it is a bit controversial. Aggressive annual increases may cause a small percentage of individuals to abandon or scale back participation in their plans in subsequent years. That small level of attrition, however, will be more than offset by the far higher levels of aggregate retirement savings that will be generated.
- Provide HR intervention to reduce abandonment. Increased automatic contribution levels will result in some employees leaving the program. For those who do, give them the option of continuing to participate at previous levels. Or else harness the power of inertia. Offer an “opt-in” annual increase – but market it vigorously.
- Supplement the services of your 401(k) provider with a qualified asset management/advisory company. These firms come in all sizes and flavors – from industry leaders like Financial Engines and GuidedChoice, to “boutique” players such as ProManage. Let’s face it — most people have little time or inclination to manage their retirement savings. Companies such as these have proven track records of engaging employees and systematically improving their returns, at little or no cost to you.
- Match, match, match. Studies show that 401(k) matches are second in popularity only to health insurance benefits. You’re already spending an additional 44 percent of salary in benefit costs; an extra 1 or 2 percent in matching retirement savings will result in major gains in retention, employee relations, and retirement readiness.
- Host a financial wellness “fair.” There are plenty of companies offering fun and interesting ways to engage individuals in their own financial health. An annual (or even quarterly) meeting in which a number of these companies tout their wares to your employees will certainly cost you less than the productivity losses caused by financial distress.
Perhaps most important, you should get started on these projects today. Your employees have no time to lose – and the rewards are yours to reap.