By Joseph Bonasera
Too many employers and their retirement plan advisors continue to have a “forest versus trees” perspective when it comes to managing costs associated with and their employee retirement plans.
While the focus tends to be on saving a few basis points in recordkeeping, advisory and investment costs, substantially more can be gained by better employee retirement preparedness. Many executives are surprised with the steep price a firm pays for employees who stay on the job because they have to, not because they want to. These “trapped” employees can’t afford to retire and represent a substantial liability to the firm.
It is now starting to be recognized. One recent report on plan sponsor attitudes shows their top concern is whether their plan is effectively preparing employees financially for retirement. That’s a reversal from what is now the second most important issue – reducing business costs associated with the plan.
The cost of retirement “unreadiness” starts with the wage differential between older employees who can’t afford to retire and younger replacement workers. An aging work force also poses more exposure in both the health care and workers’ compensation arenas. As individuals age, the healing process takes longer and can be complicated by other medical conditions that often develop. In the workers’ compensation area, not only are the medical costs higher but any associated disability is longer. This includes the wage replacement benefits that are part of workers’ compensation laws.
And then there are issues that may be harder to quantify, for example, if older employees can’t afford to retire, it reduces opportunities for younger employees, and talent could be lost to competitors. In a full employment economy, that’s a costly loss to absorb while striving to stay competitive.
To quantify the costs of delayed retirement, consider this scenario at a 240-employee organization. The average new hire for a driver’s position, at age 31, would cost the company $47,612 in wages, $4,437 in healthcare and $1,704 in workers’ compensation. By contrast, the average 67-year-old employee currently in that spot who has been putting retirement off would cost $59,092 in salary, $11,812 in healthcare and $4,505 in workers’ compensation. The differential is $21,656, a sizeable cost/liability when multiplied by the company’s 41 workers in the 62 to 70 age bracket who can’t afford to retire.
Consider four ways employers can improve their employees’ retirement preparedness to start abating such costs
- Health Savings Accounts (HSAs). Offered in conjunction with high deductible health plans, the triple tax benefits of HSAs make them the most tax-efficient way to save for retirement. Money is shielded from taxes going into the account, as it grows and when it’s withdrawn (as long as it’s used for a long list of eligible medical expenses). They’re an important part of a long-term investment strategy, with the funds rolling over and plans portable through job changes and retirement.
- Auto enrollment. Nearly 90 percent of employees who are auto-enrolled in their retirement plans stay in their plan. This is especially true for younger workers. If they enroll at a starting withholding rate of 2 percent, and that’s auto-increased by 1 percent each year until the 8 percent maximum is reached, there will be a marked improvement in retirement readiness and a stronger balance sheet for the employer.
- Financial wellness and retirement preparedness education. Education is the biggest driver of behavioral change. Specifically, plan participants need to be shown how to use income replacement software tools that help them understand how much they should be saving given their account balance and age to build a paycheck for life at retirement age.
- Target date investment options. Investing plan assets is another difficult, yet important, decision for plan participants. Target date investment options are a good solution for many because the level of risk in the portfolio reduces as the participant approaches retirement. These products are designed to help participants accumulate wealth and protect against the risks of longevity, inflation and capital during the retirement years.
Employers who invest time educating employees about financial wellness should have a more engaged and productive, and less stressed workforce, experiencing tangible financial benefits in the process.
Retirement preparedness is a growing issue as baby boomers age their way out of the workforce. Addressing it now will help improve the financial futures of the next generations of workers and employers.
HUB International’s team of retirement plan fiduciary advisors provides ongoing guidance on your plan’s structure and management to ensure it meets regulatory compliance guidelines and the interests of your employees.
HUB Retirement Services Specialists are Registered Representatives of and offer Securities and Advisory services through various Broker Dealers and Registered Investment Advisors, not affiliated with Hub International. Insurance services are offered though HUB International, an affiliate.