Longer life expectancies and the individual responsibility for retirement savings are combining to challenge conventional thinking and to re-shape the relationships between employers and their older employees.
Individual retirement savings, primarily through 401(k) plans, are now being evaluated in terms of benefit adequacy and secure monthly income in retirement. Increasing life expectancies mean that workers must save enough to last for 20 to 30 years of retirement . . . if they retire at 65.
From an employer’s perspective, this almost certainly means that many employees will continue to work until 70, 72 or even 75, in order to save enough to have an acceptable standard of living in retirement.
Even with those considerations, though, there is no legal requirement that 401(k) plan sponsors provide education, services, investments or insured products that will help their employees understand and manage these issues. However, there are significant practical benefits for plan sponsors who address these issues:
- Older workers know that they need help.
As workers begin to approach retirement — perhaps at ages 50 or 55, they become more aware that their 401(k) plans are “retirement” plans and become more engaged with the plans and the services. By responding to their needs, plan sponsors can show their concern and enhance appreciation for the plans.
- Many companies care about their employees.
Conventional wisdom seems to be that employees should expect to work for many companies during their careers. However, some employers care about their employees and want to encourage long-term employment. By demonstrating an awareness of the needs of their employees at different life stages, those plan sponsors can communicate a long-term perspective towards employment.
- Plan sponsors can address issues raised by an aging workforce.
While it may be attractive to have energetic, engaged and experienced older workers, the same probably cannot be said of employees who would rather be retired, but are forced to work because of financial insecurity. By providing education, investments and products that empower employees to make better savings decisions and that provide secure retirement income, plan sponsors can improve the likelihood that their employees will be able to retire, if they want and when they want.
- A bad stock market shortly before retirement can disrupt and delay retirement plans.
Plan sponsors should consider offering products that limit stock market damage during the five or 10 years preceding expected retirement ages — think about 2008 and the losses in the accounts of older employees. One idea is to allow participants to accumulate “units” of annuities in their 401(k) accounts. Another concept is a guaranteed minimum withdrawal benefit, or GMWB, where participants are guaranteed retirement income based on their highest account balance. While annuities and GMWBs are insured products, there are other investments that are designed to protect — if not guarantee — principal in the years approaching retirement.
- Unless an employee knows what his monthly retirement income will be, how can he know if he can retire?
As the aging boomers focus on retirement, they will need to know what their 401(k) account and social security (and perhaps personal savings) will produce as a monthly retirement income. Equipped with that information, they can determine if they can retire comfortably.
However, to the extent the retirement income is unknown or is uncertain due, e.g., to stock market fluctuations, many older workers will be insecure with their prospects. One likely outcome is that some will work longer, so that they can increase their retirement savings. Plan sponsors should provide their participants with projections of retirement income and with a “gap analysis” service that gives guidance of increasing deferrals to reach retirement goals. (Some providers already offer this service to their plan clients.) Plan sponsors should also consider offering products that can provide guaranteed income for some or all of a participant’s 401(k) account – at the participant’s option.
We are entering the next stage in the evolution of 401(k) plans. Plans need to provide adequate monthly retirement income. And that income must fit the needs of older workers: fully guaranteed for some; partially for others; and not insured for the balance.
As with 401(k) plans generally, participants should have the flexibility to manage their accounts in a way that meets their individual needs and plan sponsors have good reasons to provide the support — education, services and products — for that.
Fred Reish is an attorney with Drinker, Biddle & Reath LLC and an adviser to the Institutional Retirement Income Council.
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