By Darren Royal
From the Spring 2019 Journal of the Colorado Dental Association
Americans pride themselves on making their own decisions, and when to retire is an important one. But it takes money to retire, and the shift away from traditional pension plans leaves many Americans ill-prepared to retire when they want to. Employees who struggle with their finances find it challenging to save enough to retire on their own terms. Yet many seem to long for the “good old days,” at least in the sense of knowing they will receive a monthly income throughout retirement.
Saving for retirement, through 401(k) or other defined contributions plans, has become an individual responsibility. Some would like to retire at 55 or 60 but must delay retirement until age 65 when they become eligible for Medicare. Others may want to retire at 65—the traditional age of retirement—but because of financial concerns they must wait to take the plunge until they reach full Social Security retirement age. Without adequate resources, employees have less choice about when to ret. As an employer, you face a challenge. Attracting and retaining the right talent is necessary to drive your business forward. At the same time, you likely feel a responsibility to help your employees achieve retirement financially prepared. A
401(k) plan can help manage both goals.
Employees Want to Partner with Employers
Employees continue to want to partner with their employers in the planning and execution of their retirement savings, according to a recent survey from MetLife’s Role of the Company Survey.[1] In fact, they said they want their employers to be more involved in providing for their retirement security in the next five to 10 years; 61% of respondents agreed with that sentiment, compared to just 9% who said the employer should be less involved.
When asked whether they would prefer to set aside part of their salary into a company-sponsored retirement plan or into the Social Security program, about three-quarters said they prefer to channel their money to the company plan. In the survey, 56% said they would prefer to save on their own rather than paying into Social Security, if those were the only two choices. 44% preferred Social Security to saving on their own.
Timing of Retirement is Important for Employers, Too
Employers have a stake in the timing of employee retirements. They, too, may suffer financially when employees are unprepared to leave the workforce on time. Of course, there are positive aspects to keeping older employees—experience, institutional knowledge, and a broader perspective, to name a few. However, employing older people who wish they were retired can have serious financial consequences. They may be distracted by financial concerns, less engaged in your practice and their job, and less motivated than those who are happy to be working. They also reduce the company’s ability to hire new talent, because of a lack of open jobs.
The Cost of Delay: Significant
A recent study found that a one-year delay in retirement for an individual can cost an employer up to $50,000.[2]
To address the issue of delayed retirements, the study suggests adopting retirement programs with features that encourage appropriate financial behaviors. For example:
Saving: Include an employer match to encourage more saving, and automatic enrollment and auto escalation to remove barriers to entry and increases in contributions.
Investing: Offer quality investment alternatives for participants who prefer professional management of their account, and for those who fail to make an investment choice.
Financial education is also critical to helping employees retire on time. Participants who are informed and confident often make better financial decisions, which can lead toward long-term security. How much do employees know about saving for college while at the same time staying on track for retirement? Do participants know how much of their retiree medical expenses will be paid by Medicare? And do they understand how to maximize their Social Security benefits? Offering education on these and other important topics can create a healthy workplace where employees feel empowered to meet the challenges that come their way without letting their productivity suffer. This can be a boom to your bottom line.
There is good news: employers are in the best position to make an impact on the numbers. Combining financial literacy education as a regular part of 401(k) plan communication can lead to changes in behavior. In turn, these changes may lead to better financial stability for employees during, and after, their working years. If you plan to offer employees a program of financial education, be sure the one you choose is engaging and interactive. The information should be easily accessible and flexible, too. Both can be achieved through web-based tools the employee can use whenever and wherever individual circumstances allow.
Darren Royal is the president and owner of Royal Wealth Management. Contact him at 720-733-9143 or darren.royal@lpl.com.
Securities offered through LPL Financial, Member FINRA/SIPC.
This information was developed as a general guide to educate plan sponsors but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Securities and advisory services offered through LPL Financial, A Registered Investment Advisor. Member FINRA/SIPC.
[1] https://www.metlife.com/about-us/newsroom/2018/april/for-retirement-employees-prefer-steady-paycheck-overmanaging-th/
[2] Cost of salary and benefits of a retiree versus a new hire, using national averages of salaries and benefit costs by age. http://research.prudential.com/documents/rp/SI20_Final_ADA_Cost-of-Delayed_1-4-17.pdf