THREE WAYS PLAN SPONSORS CAN REDUCE DELAYED RETIREMENT COSTS

Roughly 10,000 baby boomers are retiring every day in the United States.  Many would like to retire sooner but are not able.  46% of workers don’t believe that they will have enough money to retire.¹   In this article, “Impact of Delayed Retirement on a Retirement Plan Sponsor”, several research projects quantify the costs in the range of $35,000 to $50,000 per year for each employee who delays retirement.   How can a plan sponsor mitigate their financial exposure?

Adopting a game plan to approach this problem is a priority.  A plan sponsor should consider a succession plan that involves all employees, not just the C-suite.  Planning today will help reduce a business’s liability in the years to come.

Here are three best practices for employers to help their employees be financially secure so that they may retire on time.

1. Consider adopting retirement programs with features that help employees retire     on time. Many plans have adopted a default investment alternative that assists employees not willing to make their own investment decisions.  Investment alternatives such as target date funds, target risk funds, or model portfolios match employees to a reasonable risk level.

Two other features supercharge employee savings.  Automatic enrollment enrolls new and in some cases existing employees into the plan.  Bringing employees into the retirement plan at the earliest available date will allow time and compounding to work its magic.  Automatic escalation continues the account growth by increasing the amount of savings each year.  Usually, a participant will begin saving at an initial rate (for example 4% of compensation) and each January the savings increases (say by 2%) until a desired savings rate is achieved (maybe 12-15%). 

A plan participant may elect to opt-out of any of these automatic features.  However, nationwide experience reveals that only about 6% of employees will opt-out. Optimistically, one could conclude that employees find these features to be desirable.

2. Provide education to help employees proactively make informed financial decisions. Most recordkeepers have a landing page that can help employees calculate their future income from all sources.  It is easy to change variables such as the expected retirement date and varying the contribution rate.  Periodic campaigns designed to motivate plan participants to visit their account site helps employees reach their savings goals more confidently.

 3. Adopt a holistic approach to improving employees’ financial wellness. Employees are pulled financially in many different directions, and a comprehensive wellness program can be helpful in reducing stress and improving productivity.  Wellness programs cover more than the retirement plan.  Programs can include budgeting, debt elimination, emergency fund, financial planning, and much more.  The best programs come from trusted sources and are easy to follow.

Most employers expect their employees to make sound decisions.  Combining incentives, plan design, and financial education will help both the plan sponsor and each of the plan participants to reach their desired goals.  Ultimately, a work force that is retirement ready is the best work environment.

¹  Gallup.com, 5/9/2018.

Last reviewed 6/1/2022