'25 is the new 55': How to jump-start employees' retirement savings early in their careers

Over and over again, employees find themselves unprepared for the realities of retirement. Why aren't employers doing enough to present a clear path to retirement readiness? 

According to recent research by HR and benefits consulting firm Buck, just 27% of employees feel confident they can cover their expenses in retirement, while 19% have no idea if they'll have enough saved. Buck found that almost 45% believe they need $1 million dollars in retirement — a lofty goal, considering the average retirement account balance is $65,000, according to the Federal Reserve. Meanwhile, 50% of women and 47% of men between 55-66-years old have no retirement savings at all. 

"Folks in the U.S. are a little bit confused and probably a bit delusional about what's going to happen in retirement," says Tonya Manning, wealth practice leader and chief wealth actuary at Buck. "People want to have a retirement plan and they want to retire with dignity and with a lifestyle that's comparative to what they had when they were working. But the way they want to get it is not supported by our retirement system right now." 

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While half of employers offer a retirement benefit, according to ADP, that percentage varies depending on industry and company size. For example, 90% of employers with 500 employees or more offer some sort of retirement plan; of those with 20 employees or less, just one-third have a retirement plan option. Yet a 401(k) is simply not keeping up with employees' career trajectories today, Manning says. 

"The way that Americans work is transforming — we're going from 9-to-5 jobs to contract and gig work, and those ways of working are not always tied to a retirement savings possibility," Manning says. "The other issue is we have people who feel that if they are saving up to what is matched by their employer, that's going to get them on track. What is matched is often around 3%, and what is needed is very much more than that."  

Buck found this gap in retirement preparedness is in conflict with employers' attitudes around how effective their plans are: While 91% of HR professionals believe their retirement benefits are competitive, 61% of employees think they can find a better retirement benefits package at a different company. A lack of communication around retirement savings is likely to blame, and needs to be addressed swiftly, says David Eisenberg, a principal in the wealth practice at Buck.

"An employer who's not working to be sure that their benefits are competitive is frankly putting their ability to recruit and retain their best employees at risk," he says. "There's a scarcity of really strong communication that helps people understand their plan. If the plan sponsor is confident that the plan is competitive, and is well-designed for participants who just select all the defaults and go along for the ride, that needs to be embedded in their communication strategy." 

Student loans and emergency savings must be addressed

For many employers, a "set it and forget it approach" is what drives their plan design — mandatory enrollment in a plan, paired with auto-escalation has made it so that employees have access to retirement savings early on in their careers. Yet those early habits don't always stick because of financial hurdles that quickly get in the way, like student loans and a lack of emergency savings. 

In fact, Buck found that 53% of employees would prefer a mere $500 salary increase instead of a retirement contribution of the same amount, revealing how immediate many people's financial needs are. Thirty-five percent said cost-of-living expenses were their biggest hurdle in saving for retirement, followed by personal debt and financial obligations to family. 

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Provisions within SECURE 2.0 have addressed many of these concerns to deter employees from opting out of employer-sponsored retirement plans due to other financial priorities. The hope with these regulations is that employees will feel more empowered and capable of managing many financial responsibilities in tandem with their long-term savings plan, Eisenberg says. 

"SECURE 2.0 empowers plan sponsors to make plan contributions that would offset student loan payments, as well as a provision for people who want to build emergency savings," he says. "So by improving these provisions, there's a regulatory framework to encourage people to participate sooner — they may be at a lower contribution rate, but they're still in the plan." 

This first step — boosting participation — is critical, and needs to happen earlier and earlier to account for financial stressors and inflationary pressures that threaten an employee's financial stability, Manning says. A mindset shift is an important lesson employers need to start learning, and teaching. 

"Twenty-five is the new 55 — that's when you need to start thinking about retirement and getting ready," she says. "But what we really need to do is think about the total financial well-being and preparedness of your employees before you even start drilling in on whether they're saving enough." 

Building a solid financial foundation before retirement

To do that, employers need to figure out if employees are managing their day-to-day expenditures, and what other financial needs are taking precedence over retirement contributions, whether it's caregiving or student loan payments. Only once those responsibilities are under control can retirement education and planning be most impactful. 

"People need that foundation and an understanding of their financial situation, and how to get to a steady state of being able to manage today and being able to manage their tomorrow," Manning says. "Only then can you get into conversations about how they're saving for retirement." 

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That work requires more effort from employers, and a hard look at what is driving their motivation in supporting their workforce, Eisenberg says. 

"Is an employer trying to do what they can get away with, or do they really care about the welfare of their employees?" he says. "I would say with most of the partners we talk to, they don't want to spend more than they need to spend, but they want to make sure that what they are spending on retirement plans is being spent well and to the benefit of employees." 

Still, there is plenty of room for improvement in acknowledging and accepting their responsibility in supporting the total well-being of their employees, Manning says. While strides have been made, employers cannot stand idly by when it comes to these efforts. 

"Employers have so many things they need to take care of in order to have a functional and healthy workforce, and retirement is one of those things," Manning says. "Some are very into  understanding the analytics and preparedness, and others are just making sure that they're providing an opportunity. Employers can do more to make sure employees have that baseline financial acumen, and then layer on being more proactive around different employees and their differing needs."