Many things get in the way of people saving enough for retirement. Buying a home. Student loans. Getting married. Having kids. All of these competing priorities make it difficult to set money aside for something that seems light years away.
A new study by the Think Tank at Financial Finesse found that employers can do more when it comes to helping employees prepare for retirement.
There is a pervasive attitude that if a person is in their 20s and already saving for retirement, there’s something wrong with them, says Greg Ward, director of the Financial Finesse Think Tank. The message that “you have to live for the moment, you can wait until you are in your 30s [is] the wrong message,” he says. “We think employers have a tremendous opportunity to help with this, particularly when you look at [industry retirement] studies. Employees trust information provided by employers more than information provided by the industry or their own family.”
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So what can employers do with this information? They can use it to help educate their workers about how a little bit saved now can have a huge impact later on.
The first step is to get employees to actually acknowledge there is a future and they need to run their financial projections immediately, Ward says.
In its State of U.S. Employee Retirement Preparedness report for 2015, Financial Finesse found that 61% of employees who took a financial wellness assessment had no idea if they were on track for retirement.
“They are not running projections or using available resources to know what ‘on track’ looks like,” he says. “If employers can give employees incentives for running these projections, we know that some of that 61% may be on track but they just don’t know it.”
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He adds that if you examine the characteristics of the population that doesn’t know if they have saved enough for retirement, “they are much more in line with those who are not on track than those who are on track. The majority of them are not on track. They are putting their heads in the sand. They don’t want to look at the numbers,” he said.
Another missed opportunity is auto-enrollment and auto-escalation. Many large employers have adopted these measures, which definitely gets people enrolled in their 401(k) plans. The bad news is that most employers opt workers in at low contribution levels — between 3% and 6%.
Most financial professionals will advise people that they need to save between 10% and 15% annually to achieve enough savings to get them through retirement. Ward says that employers need to be bold. They should start opting employees into the plan at 10% or more. Studies have shown that only a small percentage of workers will take the time to opt out of a 401(k) or other workplace-sponsored plan once they have been opted in.
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“Setting the default rate at 10% or more will get people at the levels they should be saving at and we probably won’t see opt out rates that prevent employers from doing that,” he says.
Automatically escalating employee contributions is also a useful tool because it counteracts employee inertia. Employees “will adapt to the paycheck coming home and are much more likely to get to the saving rate they need to get to,” says Ward.
Employers can also help by giving employees a more holistic view of their benefit offerings. Perks like health spending accounts are underutilized as a retirement planning tool, says Ward, because many people don’t realize that the money they don’t use in these types of accounts gets carried over into an investment account that they can use for future health care expenses.
“There’s a lot of money invested in these benefits but employees don’t know how to ultimately weave them together for financial planning today,” he adds.
Paula Aven Gladych is a freelance writer based in Denver.
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