As a retirement plan sponsor, it is a necessity to offer your organization a 401(k) plan that equips your employees with the tools to help them save for a comfortable retirement. Supporting your employees’ journey to retirement is just as beneficial for the employer as it is for their employees.
Benefits for Employers
Financial wellness and retirement readiness are inextricably linked; often employees with ongoing financial worries are unable to plan effectively for their future. Further, an employee’s level of financial wellness directly affects their productivity and retention at work as well as their ability to save for retirement.
Managing financial worries is an enduring source of stress for employees throughout the United States. Approximately two-thirds of employees stated their financial stress increased as a byproduct of the disruption caused by the pandemic. Of these employees, 45% stated that their financial situation has impeded on their productivity at work.
While the pandemic strained businesses, the employees shouldered the burden of many companies’ cutbacks. From layoffs to reduced salaries and freezing raises, many employees are debilitated by both the short- and long-term financial implications of COVID-19. Due to these enhanced financial stressors, employees are four times more likely to pursue employment with an employer that offers financial wellness services. This has directly impacted employee retention within companies that do not offer these services.
With 87% of employees indicating that they want help with their personal finances, employers have an opportunity to make an impact on their employees’ financial wellness and retirement readiness. The employee engagement with financial wellness services offered by their employer increased to 88% in 2021. As the pandemic continues, these services will address enduring financial concerns negatively impacting employee performance at work.
How Sponsors Can Help Improve Retirement Readiness
There are several steps employers can take to help their employees improve their financial wellbeing and retirement readiness:
Developing a solid communications strategy is an important first step in helping your employees retire. Ensuring that these communications are in “plain English” as opposed to industry jargon is important. Keeping employees informed about plan updates and other information they need to make good investing choices will help build trust and may even encourage employees to learn more on their own about investing for retirement.
Automation has been shown to increase employee participation on several fronts. Auto enrollment, both for new employees and periodically for existing employees that are not participating, can help increase participation in the plan. If employers enroll employees at a higher contribution rate than the typical 1%-3%, this will move them even further along the path to retirement readiness.
In addition, including an auto escalation feature with auto enrollment ensures that employees don’t just stagnate at the default percentage, because their contribution rate will automatically increase each year. They will be given the ability to opt-out as well, but this requires that the employees proactively make the decision not to participate.
The default investment option matters as well. Off the shelf target date funds are fine; however, in some cases, managed accounts are shown to enhance participant engagement, contribution levels, and ultimately, the amount employees are able to accrue for retirement.
Education and advice
Financial wellness education is an integral component of an employer’s efforts to support their employees’ journey to retirement readiness. The educational approach will vary based on the composition of your organization’s workforce. Nonetheless, educating employees about the benefits of a 401(k) and other tax-advantaged retirement vehicles is a good start.
Education regarding the entire retirement landscape from Social Security and the cost of healthcare in retirement to taxable versus tax-advantaged accounts will facilitate their movement along the path to retirement readiness.
Sponsors should also consider offering access to actual advice. This will allow employees to tailor their retirement savings and the investments in their 401(k) to their unique financial situation. Personalized advice will be able to help employees work through their own planning issues to ensure they are on track.
Offering an employer match allows your employees to save more and increases participation. Employees don’t want to miss out on this “free money.” The supplementary money from employer matches is influential in your employees’ progress towards retirement readiness.
Retirement income solutions
A significant number of employees have indicated they are worried about outliving their money in retirement. Many participants have indicated that retirement income advice associated with their plan would make a meaningful difference.
The number of employers offering retirement income solutions is rising. An employer-sponsored retirement plan is worth looking into, especially if your employees have expressed a need or desire to financially plan for their future.
While employees are responsible for their own savings with a 401(k) plan, helping them along the path can mean the difference between employees achieving retirement readiness and finding themselves in a difficult situation as retirement age approaches. Helping your employees retire benefits both your employees and your organization’s effectiveness over time.
Shelton Capital Management does not provide accounting or tax advice to its clients. All clients should be aware that tax treatment is subject to change by law, in the future or retroactively, and clients should consult with their tax advisors regarding any potential strategy, investment or transaction.
The information provided should not be considered investment advice and does not provide information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security.