Employers prioritizing financial wellness, retirement readiness

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Retirement plan sponsors are beginning to understand why helping employees get ready for retirement is so important.

In the past, employers weren’t really concerned with employees’ financial well-being. They didn’t think it was their job. Fast forward to today and 39% of employers that offer a defined contribution plan view their employees’ retirement readiness as a current risk.

In its Retirement Plan Governance Survey, consulting firm Willis Towers Watson found that employers are increasingly concerned for their employees’ financial wellbeing and are planning to take action to help them retire in a timely manner. Many of the employers surveyed responded that they plan to shift resources to financial wellness and retirement readiness over the next couple of years.

“Not surprisingly, retirement benefit adequacy and the financial fitness of their workers are growing concerns among employers,” says David Suchsland, senior consulting actuary at Willis Towers Watson. “This is particularly true among employers that offer only a defined contribution plan. In fact, workers’ inability to retire in a timely fashion was identified as the top risk for nearly six in 10 of these plan sponsors. The ongoing shift to DC plans is now prompting employers to prioritize resources that promote retirement readiness.”

The nation’s shift away from defined benefit retirement plans to defined contribution plans, like 401(k)s and 403(b)s, has placed the responsibility for a secure retirement squarely on the shoulders of employees, most who do not have a high financial acumen, says Suchsland.

For baby boomers who are already retired or are close to retirement, “they need a better understanding of what their income will be in retirement, their expenses, how to balance it and how long will it last,” he says. For millennials, on the other hand, many plan sponsors are concerned because the younger workers aren’t entering the workforce with a good base of financial knowledge.

“It is important they have [this financial knowledge] so they can get their finances under control and figure out where to put the dollars they are earning,” Suchsland says. Millennials have higher levels of credit card and student loan debt compared to members of Generation X and baby boomers.

“Putting $1 in the 401(k) is good for the long run, but it may not be the answer if you have other obligations,” he adds.

That’s why it is so important for plan sponsors to help educate employees about financial topics like paying down debt, building up an emergency fund and better managing day-to-day expenses. Employees have to get a handle on all of these things before they can focus on retirement readiness.

“There has been a lot of research the last few years about engagement, productivity and the correlation of financial issues and lower rates of productivity and more time out of the office. Employers do say there is a potential return for them if they can improve the overall financial wellbeing for the organization,” Suchsland says.

The majority of DC plan sponsors devote their top investment resources to monitoring fees (74%) and manager performance (61%), the survey found. But the percentage of DC plan sponsors who are making benefit adequacy a priority is expected to more than double in the next two years, from 18% to 38%, according to Willis Towers Watson.

“We are beginning to see governance committees adopt a more holistic view to DC oversight. They continue to review investments and plan fees, and they are also considering retirement readiness and how the program influences plan participants’ behavior to improve outcomes for them,” Suchsland says.

Retirement plan design can help improve retirement readiness among employees. More plans are adopting automatic features like automatic enrollment and automatic escalation of plan deferrals. They are also including Roth 401(k) options to give plan participants another tool to manage their finances in retirement. Money placed in a Roth 401(k) goes in after taxes and comes out tax free.

Student loan debt pay off programs are growing in popularity as a workplace benefit to help employees get a handle on their finances, and many employers are giving their workers access to budgeting tools to help people who are living paycheck to paycheck.

“I think the broader financial well-being is getting much more focus than the annuity options related to DC plans,” Suchsland says. The current low interest rate environment makes annuities a “very expensive” option so they haven’t gained a lot of traction in the industry.

If a company is struggling, it is hard to get its executives to pay much attention to financial wellness and retirement readiness.

There are organizations that are “true believers in this, they get it and are trying to improve the overall wellbeing of their workforce. There are others in a holding pattern. They know it is the right thing to do but they are stalled; they don’t have the budget now or the resources from a time perspective to get it done,” Suschland says.

Willis Towers Watson surveyed more than 300 U.S. retirement plan sponsors in a variety of industries for its study.

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