Human Resource (HR)
Category: General HR
Most companies want to see a predictable and stable retirement of their older employees in order to facilitate growth opportunities for younger and more technologically advanced employees. That is one of the main reasons why companies sponsor 401(k) plans. But, based on the findings below, this is not going to happen. If employees can't afford to retire, then most of them will not retire. With age discrimination laws, it may be difficult for employers to let these employees go without cause.
These alarming findings from the Employee Benefit Research Institute's "The 2010 Retirement Confidence Survey" were striking to me and should be concerning to you:
- Only 16% of workers were very confident about having enough money for a comfortable retirement.
- Only 60% of workers say that they and/or their spouse are currently saving for retirement.
- 27% of workers report that they have less than $1,000 in savings and investments.
- Only 46% of workers report that they and/or their spouse have tried to calculate how much money they will need to have saved for a comfortable retirement by the time they retire.
- The percentage of workers who expect to retire after age 65 has steadily increased over time, from 11% in 1991 to 14% in 1995, 19% in 2000, 24% percent in 2005, and 33% in 2010.
Employers have a big interest in providing incentives and assistance for their employees to facilitate their retirement. Employees who want to retire but are unable to do so:
- Are likely to have significantly higher health care costs, greater absenteeism and lower productivity.
- Costs the company in severance because older employees tend to have more years of service. and
- Can cause a decline in performance among younger employees who are unable to move up the career ladder and may decide to leave the company.
Some companies are doing an extraordinary job of helping their employees prepare for retirement. And, most companies believe that they have a responsibility to do this for their employees, but don't know how. Many assume that their investment advisor is taking care of this need. Unfortunately, the findings described above show that much more needs to be done. Here are some ideas for those companies that want to do more:
- Automatic Enrollment: Unless a new employee elects otherwise, the employee should be:
--- automatically enrolled in your 401(k) plan,
--- their take-home pay should be reduced by a stated amount (such as 3%) and contributed to the plan on a "pretax" basis, and
--- the amount should be invested in a balanced investment.
- Limit Loans and Withdrawals prior to Retirement: The primary purpose of your 401k retirement plan should be to provide for your employees' retirement. Consider only allowing loans and withdrawals for emergency purposes.
- Annuity Option: Add an option to your 401(k) plan to purchase an annuity with some or all of your employees' account balance at retirement. This will help your employees deal with the future investment and longevity risks that they will face.
- Retirement Education: Provide early education as part of your 401(k) plan enrollment to new employees on the benefit of investment planning, retirement planning and the "magic" of compound interest growth in investments. Follow up every 5 years with additional group education. In most cases, it is too late to wait until just before retirement to provide retirement counseling.
- Retirement Web Portal: Provide a robust web portal for your employees to help them plan for their retirement. Either through your own intranet or using a separate web site, the portal should give your employees the ability to:
--- have secure access to both their defined benefit and defined contribution plan information,
--- project and model all retirement benefits including Social Security,
--- read all plan documents, summary plan descriptions, prospectuses and other plan information, and
--- apply for benefits and ask questions electronically.
- Higher Matching Contributions: Encourage employees to save by increasing your matching contributions and/or profit sharing contributions. A step approach to matching employee contributions would encourage getting started (e.g. 100% match of the first 2% of employee contribution, 75% of the next 2%, 50% of the next 2% and 25% of the next 2%.).
- Defined Benefit Plan: If you have a defined benefit pension plan, consider:
--- Keeping it in place without a plan freeze or termination. It is the best way to provide retirement benefits for your long service employees and encourage them to retire. There are ways to significantly reduce the financial volatility and uncertainty of these plans without eliminating them altogether.
--- Allowing employees to roll some or the entire taxable portion of their 401(k) plan balance into the pension plan. This would provide them with a no cost annuity to reduce their future longevity and investment risks.
- No Defined Benefit Plan: If you don't have a defined benefit pension plan, consider adding a very modest plan that would, at least, provide a minimal level of retirement income and that, in combination with Social Security and your 401(k) plan, would allow career, low paid employees to live above the poverty level.
- Retirement Counseling: For a very modest cost per employee, you can provide your employees with a robust retirement modeling program and online individual retirement counseling by a certified financial planner. I have used RJ20 for my employees and recommend them highly (I receive no compensation or other benefit from this referral).
William E. Coffey, FSA has a passion to help others become ready to retire by:
- Encouraging individuals to take responsibility for their retirement planning
- Encouraging employers to provide incentives and communication to help their employees save early and plan for a fulfilling retirement
- Encourage our federal government to change their policy direction to favor rather than hinder pension plans that protect individuals from the investment and longevity risks.
Bill has actuarial training in financial modeling, probability analysis, risk management, financial analysis, financial products, demographics, employee benefit plans and the American social safety net. He has a special skill set for retirement planning that is not generally available with any other profession.
Bill is the sole owner and Chief Executive Officer of Atessa Benefits, Inc. His practice concentrates on large-plan actuarial consulting, non-qualified plan administration and executive compensation services. Since 1991, he has worked with AtÃ©ssa clients to design, finance, administer and communicate their employee benefits and executive compensation plans.
An actuary by training, Bill has more than 35 years of employee benefits and executive compensation plan experience. Prior to joining Atessa, he spent twelve years as the Director of Compensation and Employee Benefits for Allied Signal, a Fortune 500 company; five years with a New England life insurance company; and eight years with a large consulting company, Towers Perrin.
Education and Professional Affiliations
- Master's Degree in Actuarial Science, Northeastern University
- Bachelor's Degree in Mathematics, St. John's University
- Fellow of the Society of Actuaries
- Member of the American Academy of Actuaries
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