Employees Need Your Help to Achieve Retirement Readiness

April 13, 2022

After two full years of a global pandemic, are your employees any closer to being retirement ready?

Three years ago, plan sponsors were worried about the retirement readiness of their employees, as studies showed only 27% of working adults were on track to retire, and a majority of American workers planned to continue working in retirement.

Achieve Retirement Readiness

A 2021 retirement readiness survey by Aegon showed that running out of money during retirement is the No. 2 concern of workers as they consider the future. But retirement readiness affects more than your workforce’s personal finances. The need to continue working past an expected retirement age can have a dramatic impact on your organization’s bottom line.

Paying the Price for Delayed Retirement

According to research conducted by Prudential in 2019, for each year an employee delays retirement, the cost to an employer can be more than $50,000 per employee. Additional costs can come through:

increasedhealthcare_icon.pngIncreased health care costs

lowerproductivity_icon.pngLower productivity

Higher salaries

For a company with 500 employees, the cost is estimated at $2.25 million if only 15 workers delay retirement for three years.

Helping employees improve their retirement readiness may mean making a few small but effective changes to the retirement plan to improve participation. In recent years, research has shown the decisions of defined contribution plan participants are heavily influenced by default choices presented by plan sponsors. In the absence of clear directives, plan participants usually take the path of least resistance.

To increase plan participation, employers can take advantage of behavioral finance theory and implement automatic enrollment and automatic escalation to encourage employees to save more for retirement. In addition, enhancing education and communication to employees, as well as optimizing plan design and investment selections can better prepare employees for retirement.

Retirement Readiness & Plan Design Considerations

Recently, USI Consulting Group (USICG) worked with a client to improve its employees’ retirement plan participation and retirement readiness. Prior to USICG being hired, automatic enrollment had been implemented with a default deferral rate of 2% of compensation and an automatic escalation rate of 0.5% per year. Initially, the participation rate jumped from 75% to 90.4%. However, over time, it dropped back down to 75% and the average deferral rate was 5%.

USICG recommended the client conduct a re-enrollment and raise the default rate and the automatic escalation rate, which increased participation to 95% and the average deferral rate to 6.32%. Only 12 plan participants opted out. A few years after implementing these recommendations, plan participation rates remain steady, and the average deferral rate is close to 9%. This example shows how employers can increase enrollment, encourage employees to save more for retirement, and ultimately improve employees’ retirement readiness through fundamental plan design enhancements.

Implementing slight changes in your plan’s design and communicating effectively with employees can have an immediate impact for plan participants — and a future financial impact to your organization’s bottom line.

This information is provided solely for educational purposes and is not to be construed as investment, legal or tax advice. Prior to acting on this information, we recommend that you seek independent advice specific to your situation from a qualified investment/legal/tax professional.