What’s Competing for Your Employee’s Funds?

Understanding what is competing for your employee’s money can help you work with them to navigate saving for retirement and encourage more employees to save for retirement.  Employees face competing demands in heath care costs, college savings and their own personal web of debt and may be overwhelmed by these competing concerns. A recent study by Lincoln Financial showed that only 4 in 10 retirement savers are putting enough aside for retirement.  That study also showed that the more competing priorities an employee has, the less they save for retirement.  

Competing priorities are crucial. Many financial advisors suggest that while making retirement a priority is essential, it has to take a backseat to debt.  Just as compounding interest is the secret weapon in maximizing saving, it works in reverse for debt. Credit cards compound interest just as retirement accounts do, only at annual percentage rates much higher than investment rates.  Paying down credit cards first, as the interest rates are higher, is the number one priority for employees unless your company provides a retirement match. If your plan has a match program, then employees should be encouraged make the minimum contribution to the retirement plan to meet the match, so that they don’t leave money behind.

Inflation also is a drain on employee’s resources. Employees may think they have to balance inflation against possible returns on their investments. For example, if inflation surges beyond 4% that may seem like a competition to an employee who is seeing a rate of return on their investments of 6%.  As one investment advisor noted, an annual rate of inflation at 3% may decrease an employee’s spending power by half over twenty years.  And nearly half of those surveyed in a recent Pew Research Center poll said their wages aren’t keeping up with the rising cost of living. Even if your company has been making cost of living increases in salaries for your employees, their spouses’ employer may not be. The result could be a lower family income over time. And feeling like the family income is stagnant, or shrinking, may have employees worried that setting aside funds for retirement may mean funds aren’t available for emergencies.

Even more than inflation, employees are seeing their salaries fail to keep up with rising costs of housing.  In some cities, the cost of housing may be more than one third of a family’s income per month. That’s up from a quarter (the recommended budget) nearly a decade ago.  Increases in property taxes also impact the cost of housing, as those taxes may impact a family’s ability to qualify for a mortgage, making some employees prioritize saving for their first home, or a larger home, ahead of retirement funds.

Student loan debt has a significant impact on retirement savings. More than half of all people with student loan debt say it keeps them from meeting their retirement savings goals. According to investment research firm Morningstar, every dollar in student loan debt reduces an employee’s overall retirement savings by 35 cents.

Many employees say that saving for travel and vacations impact their retirement savings. They mention that saving for vacations or family travel also impacts their ability to pay off debt.

How can plan sponsors help employees understand how to budget retirement savings along with other competing costs? The first step may be having employees talk with your plan’s financial advisor to get individualized advice. Next, encouraging employees to understand the benefits of starting a retirement account early, even at a small amount, can have important impacts due to compound interest.  Encouraging employees to understand how sacrificing a few lifestyle items to pay down debt or reduce debt while also saving for retirement can also be helpful. This may be especially helpful for the employees who consider saving for travel to be a savings competitor to retirement.

Additionally, the method of explaining how to balance the competition for retirement savings may also be important. Some financial advisors suggest forgoing explanations of how to factor retirement savings in with debt and lifestyle issues on paper for an interactive option. Retirement calculators with options, videos explaining compound interest and similar tools may be more effective at showing employees how prioritizing paying off debt or saving for lifestyle items like retirement may be negatively impacting their long term retirement savings.