Lead Your Employees to a Secure Future
Lead Your Employees to a Secure Future

Lead Your Employees to a Secure Future

 

By:

Michael R. McMorris
Michael R. McMorris
CPFA, QPA, QKA, NQPA

Retirement Plan Services Director
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Lead Your Employees to a Secure Future

Why it’s your duty and your gain.

I recently led a 401(k) education workshop for a client’s employees. The CEO and founder of the company told me, “Early in my career the company I worked for sponsored a 401(k) plan. If we didn’t contribute, we were publicly shamed by our boss. My boss cared for us and knew that applying pressure might encourage us to save more for retirement.

“Today bosses don’t apply that same kind of pressure,” said the CEO. “And employees aren’t saving enough.”

Whether bosses have lost that tough benevolence or have simply benefitted from safe harbor plan designs not dependent on employee contribution rates, this story illustrates part of the retirement problem facing our nation. Perhaps it explains what I have witnessed. I’ve worked with hundreds of small- and mid-sized business owners who recognize that many of their employees are headed for retirement financially unprepared. And they’re not sure what to do about it. Despite the retirement industry’s efforts to encourage savings—via employee communications, enrollment simplification, greater access to accounts and investment information, and even gamification—savings rates are too low.

This has led me to ask the question, “How responsible should an employer be for leading their employees to a secure retirement?”

The Employee Benefits Research Institute’s 2015 Retirement Confidence Survey confirms that 57% of workers have saved less than $25,000 for retirement. More troubling is that 28% have saved less than $1,000 for retirement. But it’s not as if workers aren’t capable, because nearly 70% admit they could put more away, even if only $25 a week. Three out of four expect to work in retirement.

Plan participation rates are low. Of those eligible for a 401(k) plan, one third fail to enroll at all. And 39% don’t save enough to receive the full employer matching contribution.

Why should employers care? Why even provide a savings plan? The truth is that employer-sponsored plans have become the number one savings vehicle for American workers, by a long shot. Simply put, without 401(k), 403(b) and other types of employer-sponsored savings plans, people wouldn’t put away nearly as much as they do. For those without access to an employer-sponsored plan, 64% have saved less than $1,000. Yet half of American workers can’t contribute to a plan through their workplace because their employer doesn’t sponsor one.

Can Employers Make a Significant Difference?

A few months ago, one of my client’s employees was about to retire after 25 years working for a small local business. Donna asked if one of our financial planners and I would review her savings and help her plan the next phase of her life. She brought statements from her 401(k) account and other various accounts that she and her husband held. While she commented on each piece of their retirement portfolio, I could sense her bittersweet feelings. She knew she was taking a huge life step, which was both scary and exciting. She hadn’t put much into the 401(k) plan and admitted that she had not done all she could to save for retirement. Donna felt embarrassed that their accounts weren’t larger, but the tears that welled up in her eyes were not remorseful. They were thankful. She told me she felt lucky to work for a small business owner who had put profit sharing contributions into a plan on her behalf nearly every year. Some years the amount was small, and other years it was more significant. But the cumulative value of that retirement plan account would now provide more than half of her total retirement income.

Having said that, Donna and her husband won’t live a lavish retirement. They’ll need to make some lifestyle changes. Yes, she could have benefited from contributing more to her 401(k) plan. Even just 5% of pay for the last 20 years would have more than doubled her retirement savings. Imagine the feeling of gratitude she would have had for her employer had the owner encouraged her to put 5% of her paycheck into the plan.

Whose Responsibility: Employer or Employee?

The optimal employee contribution depends on a combination of factors such as a person’s age, current account size, employer contributions, other sources of retirement savings including spouse savings, previous employer pension benefits, inheritances, property value, and costs such as healthcare needs, caring for family members, etc. Most workers will need to contribute at least 10% of compensation over at least 20 years. (Click here for calculators to help you estimate how much you need to save: Financial Tools.) Older employees with little savings will obviously need to save much more. Young employees may do fine with 5-10% over a 30-40 year career.

Many employees don’t have a firm grasp on these numbers and consequently aren’t saving enough. Is it your responsibility as an employer to ensure your employees accumulate enough savings for retirement? Are you doing enough by simply offering a 401(k) plan? Is it your duty to do more?

I believe that it’s in the employer’s best interest to help their employees prepare adequately for retirement. Studies show that employers who help workers prepare for retirement experience less turnover and are more successful in transitioning work from an older to a younger employee. Companies that help long-term employees retire comfortably in their 60s will reap the rewards of a positive reputation, goodwill and a lasting legacy in the community.

Why are you in business? Why have you stretched yourself beyond your imagination? Is it just for the money? Or is it for something more?

Great business owners and leaders have that white-hot fire that burns in their belly. For most, that evolves into excelling at a craft, serving customers, providing opportunity, improving the community or transforming lives. If you are searching for a way to truly give more and make a positive impact, the answer may be simpler than you think. Helping to increase the retirement security of your employees will transform their outlook on life. By alleviating the great fear of running out of money, you will free their mind to focus on the important tasks and challenges of their daily life.

Whether they provide a matching contribution program, offer profit sharing contributions, provide a defined benefit plan or don’t currently sponsor a retirement plan, most business leaders wish they could do more to help employees. The reality is they can do more, with a carefully designed plan and some goal setting.

I challenge business owners and C-level executives to formally include a retirement security goal as part of their company mission. Most companies already have goals for sales, profitability, customer satisfaction, retention, and employee engagement. Why not prioritize employee retirement?

Simply providing a 401(k) plan is a good start, but it isn’t enough. I recommend a gradual shift. Instead of immediately pouring cash into the company plan, consider systematically and incrementally increasing both employer contributions and employee savings rates over a period of several years. Employees who stay with your company for the next 20-30 years will be much better prepared financially for retirement.

It Begins with Goals

Though there’s no gold standard, the process of leading an employee to a secure retirement is quite simple. The first step is setting a goal. To begin, you might set a goal to simply increase the awareness and understanding of your 401(k) plan through specific employee education, communication, tools and enrollment meetings.

What can you do now to get employees to contribute more on their own? Is automatic enrollment in the cards? Perhaps your goal is that your long-term employees can retire at age 65 with retirement income of at least 80% of pre-retirement annual income. Or specifically aim to increase the amount the company contributes. For example, a three-year goal of matching as much as 5% of pay, and 10% of pay by year 10. Or plan to make certain levels of contributions for certain groups of employees. Follow the steps below, and you will be well on your way to meeting your newest company goal:

  1. Provide employees with a tool to estimate retirement income needs so they can create a plan to reach that level. Several free calculators are available online. As a client of the Trust Company, you have a handy worksheet available in your plan enrollment booklets, and a calculator on the participant website at My401kAccount.com. Other planning tools are available at TCWealthPartners.com. If your employees need additional help, they may contact us, including one of our Certified Financial Planners ™ who can help construct a comprehensive, personal financial plan especially for those nearing retirement.
  2. Take the lead and set an example that demonstrates the importance of retirement funding. Increase your current employer contributions by a small amount now, or start next year. Budget for the increase. If you currently match employee contributions up to 3% of pay, increase that to 4%. Most of your employees will genuinely appreciate this. If you currently provide a profit sharing contribution only, add a discretionary matching contribution, which can be made either during the year or after the end of the year. Continue to increase the employer contribution by 0.5% or 1% each year or two. Raise the target rate for long-service employees, or use an age-weighted profit sharing allocation to give more to older employees.
  3. Encourage employees to save at least enough to get the matching contribution. Employees need frequent reminders. Don’t forget this step. I repeat, don’t forget this step.
  4. Repeatedly encourage employees to increase their savings rate each year by at least 1% of pay until they reach their personal savings goal when combined with employer contributions. If employees use a smart phone or computer that has a company calendar, create a reminder on the calendar. Use whatever medium or forum you need to communicate the importance of saving early for retirement and understanding one’s recommended contribution rate. Again, employees need reminders. Lots of them.
  5. If employees still do not take advantage of the match, you might implement automatic enrollment with a default rate at least high enough to get the maximum match, or at least 6%. Consider an automatic contribution escalator, too. Some employers fear that employees will opt out of contributions if the default is set higher than 3%. Believe it or not, studies show that raising the default deferral rate up to 8% has little effect on employee opt-out rate. Here’s some data from Vanguard: Vanguard.com Another study by Vanguard of thousands of retirement plans showed that automatic enrollment caused the average employee contribution rate to drop from 5.4% to 3.7% for those with income below $30,000, though that group’s participation rate more than doubled. (HAS15.pdf) Statistics such as these demonstrate the influence of employers in promoting retirement savings.
  6. Lead by example. Contribute as much as you can. If your own contributions are limited by non-discrimination testing results, consider having the company make a safe harbor contribution (either profit sharing of 3% of pay, or a match up to 4% of pay) so that your plan is not subject to certain non-discrimination tests. If you’d like to contribute more, and you are older than most employees, look into using a cross-tested/age-weighted profit sharing allocation to get your total contributions up as high as $59,000. Family members should contribute as much as possible, too. If you’d still like to contribute more, contact us to discuss a traditional or cash balance defined benefit plan.
  7. Designate 401(k) Champions. There are a few employees in your organization who are saving and investing well regardless of their income or title. Some of these employees really get it. Why not ask them to encourage other employees to learn about and take advantage of the plan, answer questions, direct them to resources, etc. Designate a plan champion at each location, someone who is not a manager or HR rep. We all know that bosses, owners, HR directors and other execs can talk until they are blue in a the face to employees about the importance of saving and many employees still won’t take action. Some workers even distrust their employer. But these people tend to trust their peers and will take action if they see their fellow coworkers doing so.

    A few of our clients who have experienced tremendous success in terms of plan participation and savings rates have such employees who cheerlead for the plan. Those champions pass along educational material from their plan provider or they check in with employees who aren’t contributing to see if they can answer questions or nudge them along. Sometimes it’s just a simple reminder from a coworker to increase the contribution rate by 1% or $10 per paycheck that can make a real positive impact on a good employee’s future livelihood. And you’ll be amazed by the fulfillment these new leaders get from passionately performing this unofficial but important role.

Reward Those You Value Most

When deciding between profit sharing, matching contributions, or a combination of both, consider your goals: do you want to encourage contributions, reward your most valuable employees, or both?

Matching programs motivate and reward employees for taking responsibility of their retirement funding and forming better financial habits. However, these employees may not be your best performing employees.

If it’s important to reward those who you value the most, consider profit sharing. Profit sharing allows employers to reward employees for contributing to the profitability of the business. While profit sharing contributions are generally provided to all eligible employees (regardless of whether they contribute any salary deferrals), it may be allocated disproportionately to certain employees, owners, execs or other individuals or groups.

Matching contributions are often contributed every pay period, whereas profit sharing contributions are typically made after the end of the year. But either one may be done during or after the year. You can make the contribution and deduct the expense as late as your tax filing deadline (including extension). An advantage to making the contribution after the end of the year is that the plan can require that employees be employed on the last day of the year and/or work as many as 1000 hours during the year in order to share in the company contribution. By having a “last-day” or “1000-hour” rule, you can ensure that contributions are for those who are fully committed to the company. Other plan design strategies are available, and it’s important that you discuss your options with an expert.

Retirement plan service providers, such as the Trust Company, are ready to support your employees as they set goals and make investment decisions. But, ultimately, it is the employer, whom they trust, who has the most influence in helping them save for their future.

Tags:  Employee Benefits, Financial Decisions, Financial Planning, Financial Security, Retirement, Retirement Plans, Small Business Owners, Wealth Management

Note:  The content of this article is for guidance and information purposes only and is not intended to be construed as advice. Information provided is not intended to provide investment, tax, or legal advice.


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