Leaders think their workforce is ready for retirement — employees disagree

• Key Insight: Learn how aligning plan design with employee risk preferences boosts retirement readiness.
• Supporting Data: 62% of participants incorrectly believe target-date funds provide guaranteed income.
• Forward Look: Expect growing adoption of guaranteed-income solutions to mitigate market and longevity risks.
• Source: Bullets generated by AI with editorial review

Leaders and employees are at odds over retirement readiness, but just a few key changes to organizations' strategies could help smooth things out.  

Over half of plan sponsors believe employees are prepared to manage their finances without a paycheck in retirement, according to a report from American Century Investments, yet only 42% of participants feel the same. In fact, fewer than half of participants feel prepared to navigate key decisions in the transition to retirement. Benefit leaders could significantly raise those odds if they can align their approach with employees' needs. 

"Everyone is playing Russian roulette with their retirement right now," says Glenn Dial, senior retirement strategist at American Century Investments. "Figuring out how to stay afloat during retirement is arguably the biggest decision in employees' entire financial lifetime and as an industry we're not doing a good job of helping them do so."

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Given the current economic climate, employees aren't feeling open to taking risks. In fact, only 19% of participants describe themselves as "very accepting" of market risk, down from 24% last year, yet leaders are still overestimating employees' comfort with potential loss. For example, despite 68% of employees preferring moderate target-date funds (TDFs) which come with a lower risk profile, 38% of organizations favor aggressive TDFs. Unaddressed, this mismatch could end up eroding savings and reducing overall retirement readiness by leaving employees with less stable returns than they expected.

These discrepancies are made worse by the fact that 62% of participants mistakenly believe TDFs provide income, according to American Century Investments, and 34% think TDFs guarantee against losses — further highlighting a persistent knowledge gap.

"Because they're called retirement plans and not savings, many employees tend to assume that that means they don't have to do more than just sign up," Dial says. "[Addressing that] is one of the last pieces of this whole retirement puzzle we have to solve as an industry." 

Read more: How AI is disrupting retirement planning for the better

Improved education and guaranteed income

Eighty percent of both employees and organizations agree that workers need help turning their savings into a steady income stream, according to the firm's findings. Yet only 44% of plan sponsors offer resources for managing finances in retirement, and just 40% provide guidance on generating income from savings. To close that gap, Dial encourages benefits leaders to invest in educational tools — like guides or expert commentary from advisers — and to explore guaranteed income solutions with providers. These products automatically convert a portion of employees' retirement savings into consistent payments for life, protecting them from market ups and downs.

Benefit leaders may run into the challenge that there are many solutions available, all of which take a different approach. For instance, the guaranteed income solution American Century Investments promises a steady 5% annual payout from their retirement account starting at age 65, even if the market drops. While retirees' income won't decrease when investments lose value, they can still increase if the market performs well. 

"The two things all of these products are trying to solve for is market risk and longevity risk because right now all that risk is on the employees to mitigate," Dial says. "Employees shouldn't have to try and time the market for when they retire or worry about consequences like living too long."

Read more: Growing number of Americans concerned that retirement is out of reach

As employees' outlook on the future of the workplace continues to waver, it is becoming increasingly important to employees to find employers that will help them build a stable future. If leaders want to successfully attract and retain talent long-term, they'll need to make sure they're on the same page as their workforce when it comes to retirement. 

"There's really no excuse," Dial says. "Start kicking the tires, look at what's in the marketplace and start doing your due diligence to do the right thing for employees and take that stress away."