Our latest research found that 92 percent of employees were saving in their employer’s retirement plan in the first quarter of 2012. Yes, 40-50 percent of private sector employers are auto-enrolling employees into their retirement plans these days, but with this high a percentage of employees participating, shouldn’t it mean employees are better prepared for retirement? Unfortunately, that’s not the case. In the same quarter we found that only 14 percent of employees felt confident they were on track to retire with 80 percent of their income (or their goal) in retirement.
There’s another side of things we have to consider to determine if employees are really on track to retire: whether employees are making the right choices about their retirement. Employers are generally doing a much better job (and kudos for that) of informing employees about their retirement benefits, but some of what employers think they’re doing right might actually not be effective. If your company is seeing high participation rates, but not enough employees better prepared for retirement, here are three things that might be wrong with your company’s strategy:
1) The company is employing auto enrollment/escalation features, but at too low a deferral rate.
The default rate employers typically auto-enroll employees at is only 3 percent. In today’s economy, financial pros are advising people to save a minimum of 10 percent of their income in their retirement plans. This means most employers are not coming even close to enrolling employees at a rate that will ensure they are successfully prepared for retirement. Though employees have the option of course to increase their deferral rates, the psychology behind having their employer do it for them (while good for getting them to start saving in the first place) can make them think everything’s under control and reduce the amount of thought they put into making important decisions like how much they should be saving.
2) The company is informing employees about retirement benefits rather than educating them.
Studies have shown that employees save more when they receive ongoing guidance around retirement planning than when they are simply informed about retirement benefits and options. Last year, a large Fortune 500 company conducted a return on investment analysis of its financial education program and found that with five or more education interactions, employees saved an average of 11 percent into their plan—exceeding the level most planners recommend to achieve a comfortable retirement.
3) The company is not getting to the root of the problem
One of the most common mistakes we see employers make when creating their retirement plan and communication strategy is that they focus almost exclusively on retirement—thinking the more education and communication they do, the more employees will take heed and better prepare for retirement. Most are ultimately disappointed to see their employees plateau after some initial progress. The reason is that retirement preparedness has much more to do with SAVING than any other factor, and employees can’t save enough for retirement unless they are effectively managing their money and their different financial priorities so that they make room for retirement among all the financial pressures and obligations they face.
To ultimately solve the retirement preparedness problem, employers have to understand exactly what is holding their employees back from sufficiently saving for retirement, and then work to address that problem. Many of the most successful plan sponsors are doing formal financial wellness assessments of their workforce in an effort to identify the financial vulnerabilities that are keeping employees from saving more for retirement, and then designing education programs to directly address this. The early results our promising—in all studies we’ve conducted, combining financial wellness programs with retirement education boosts deferral rates two to three times more than offering retirement education alone.
The good news is that any employer can follow the above tips, at relatively low cost compared to the costs employers face when employees delay retirement (estimated at $10,000-$50,000 per employee per year for every year an employee delays retirement beyond normal retirement age). With a few tweaks to your company’s retirement plan and education strategy, you can ensure employees don’t just save for retirement, but that they actually are able to achieve it.