The Retirement Readiness Risk

Not every employee is well-prepared for retirement. A 2015 Schwartz Center for Economic Policy Analysis study revealed that 68% of the US work-age population (25-64) did not participate in employer-sponsored retirement plans, and the reasons are many – their employer didn’t offer one, they weren’t working, or they simply chose not to participate.

That lack of enthusiasm for retirement savings continues today. In CDC and GAO reporting, 52% of households have a retirement account. While that sounds promising, the reports note that the average household retirement account had $60,000 in 2016. Breaking it down further, high-income households had a median $403,000 in retirement savings; middle-income households, a mere $25,000.

For employers, that should be a big deal. Employees’ financial well-being, including being adequately prepared for retirement, is a key factor in workforce motivation, productivity, and decreased health benefit costs, says a study conducted by The International Foundation of Employee Benefit Plans. In the study, 4 out of 5 employers cited an employee’s financial issues as somewhat, very, or extremely impactful on job performance. In fact, 76% of employers say stress impacts performance, and 60% add that their employees are unable to focus at work – 34% say that absenteeism and tardiness are attributed to financial problems.

Luckily, employers and plan sponsors are showing growing concern for the financial health of their workforce. The Willis report reveals that 39% of today’s employers and plan sponsors view retirement readiness as a threat to the business; 44% believe it will be a risk for them two years from now.

Yet plan sponsors are lacking in their approach to ensuring such readiness. According to Willis Towers Watson, just 19% of those surveyed say they monitor retirement readiness of their employees each quarter or more frequently; 38% monitor on an annual basis, and 24% monitor retirement readiness on an ad hoc basis.

Beyond productivity and motivation, employees who are not retirement ready can often cause an unintended consequence simply by working longer – promotions and departmental moves sought by younger employees don’t happen. The result: younger workers leave for better opportunities.

For plan sponsors looking to change that dynamic, there are some strategies that can help improve retirement readiness and allow people to retire earlier.

Educate on catch-up contributions.

For the older worker demographic, often the more compelling reason or remaining on the job is the lack of adequate retirement income. Plan sponsors can help older workers improve their retirement savings by educating them on the catch-up contributions that allow workers aged 50 and older to add additional contributions above the annual plan limit to a qualified retirement plan.

Introduce them to Saver’s Credits.

For certain income brackets, the IRS Saver’s Credit gives employees investing in a retirement plan a percentage-based credit for their eligible retirement contributions. The credit can be worth up to $2,000 per person per year.

Note: the Saver’s Credit is available to qualified people aged 18 or older who cannot be claimed on someone else’s tax return, and who are not full-time students.

Create targeted engagement/communication processes.

While the older worker is indeed a focus, plan sponsors should not overlook the need to communicate with every workplace demographic. Yet all-encompassing communications of the one-size-fits-all variety rarely fit anyone.

Instead, plan sponsors should identify the needs within each employee age demographic and create content that appeals to that particular group. Keeping in mind employee behaviors, their current engagement level, and their decision-making patterns, plan sponsors can develop better communications that are targeted to that group, which improves retirement saving outcomes.

Implement an ongoing financial wellness program.

While plan sponsors are communicating with their employees regarding healthier retirement savings, they can also help them learn how to create a budget, spend more appropriately, and close their savings gaps from both a retirement and a general savings perspective.

Your employee’s lack of retirement readiness may already be impacting their performance. Giving employees the tools and resources to help them better manage their finances, plan sponsors can become the missing link in helping drive better retirement planning outcomes, which drives better work performance and motivation.