There seems little doubt that America faces a looming retirement-income adequacy crisis. By virtually every measure, employees haven't saved anywhere near enough to fund their retirement. To cite just a few of many studies on the subject, a recent McKinsey report estimates that the average American faces a 37% shortfall in the income needed in retirement. Boston College's Retirement Readiness Index estimates 51% of Americans will not be able to maintain their preretirement standard of living. And introducing potential health care and long-term care costs increases the index to 66%.
Yet, despite these unmistakable warning signals and other surveys indicating employees increasingly are concerned about their retirement readiness, the typical employee communications used to promote employer-sponsored retirement savings programs show little evidence of the looming crisis. One only sees images of healthy senior citizens sailing, playing with their grandchildren, volunteering or traveling to exotic destinations. Go ahead - grab the first 401(k) brochure within reach. Doesn't it paint a sunny picture? Is there even the slightest hint of the consequences of not saving enough?
Why are these communications so far removed from the reality many employees are facing? And what steps can employers take to better address these issues?
Employers we work with cited five points for why employers aren't more forceful with their retirement communications:
1. Fear of pushback. Employers are concerned that employees will ask them to provide solutions to retirement-readiness issues in the form of higher pay raises and increased job tenure. So, there appears to be a tendency to let sleeping dogs lie.
2. Lack of employer financial support. It may be difficult to stress the importance of retirement savings when employer contributions are often lower today than before the recent economic downturn.
3. Lack of interest among employees. Most employers we speak with don't believe employees are interested in the topic and worry any communications would fall on deaf ears. As proof positive, we cite the relatively low acceptance of the in-plan annuity features pioneered by Prudential, Genworth Financial and MetLife, among others. These products address a genuine need in providing lifetime income protection lacking in most defined contribution plans, even allowing for legitimate concerns regarding fees, issuer security and portability. But few employees appear interested, and currently only about one in five plans offers an annuity feature.
4. Conflict with DC culture. Employers appear to be reluctant to interfere with the culture of employee empowerment embedded in the move to defined contribution retirement programs. We came to see this in working with plan sponsors replacing their defined benefits programs with DC schemes. As part of the design process, there is always a stage to measure the expected income-replacement ratio a participant would receive based on expected contribution rates, matching levels, rates of return and other factors. But we find very few plan sponsors go back after the transition to measure if the program is producing the income replacement ratios expected, let alone consider corrective measures to address potential shortfalls.
5. Reluctance to convey difficult messages. It's never easy to introduce an unpleasant topic, such as a potential retirement-savings shortfall. AXA has had to resort to using an actor in a gorilla costume to describe the need for lifetime income as the "800-pound gorilla in the room," hoping that humor will make the topic less threatening.
Why change?
Given these factors, why would any plan sponsor choose to take a different tack? Why highlight an issue that potentially will cause concern and tumult in your workforce? Because the problem can be substantially eased if there are significant, but not unobtainable, changes to saving and investing patterns. We believe that most sponsors want to do the right thing for their workforce by raising this important issue.
Employers soon may be faced with the prospect of an increasingly older workforce that is unable to voluntarily retire due to a lack of accumulated savings. Senior management may call into question the whole basis of providing retirement benefits if they are told the programs aren't meeting their goals of facilitating voluntary retirement.
New strategies
Recognizing the issue, plan sponsors and vendors are asking about new communication strategies to raise employee awareness to better engage employees to save for retirement. Four of these strategies include:
1. Build honesty - and urgency - into the message. In the past, retirement savings plan promotional materials positioned these plans as a convenient way to build a nest egg to supplement a pension plan and Social Security benefits. Today, a DC plan often is the only employer-sponsored retirement vehicle available to an employee. So it's no longer an option; it's critical to save a substantial amount - at least 12% to 15% of each year's pay, according to some experts - for retirement. If employees are not saving that much, tell them, simply and candidly, that they need to save more. We once worked with a senior vice president of human resources who suggested distributing cans of cat food to all employees not contributing to the company's 401(k) plan as a way to dramatize the consequences of failing to save enough. And while we convinced him that this approach was too harsh, he at least recognized the need to get people's attention.
2. Show real numbers that employees can understand. Research shows that employees will understand retirement savings goals in terms of account balance more easily than income replacement. So, instead of suggesting that employees save enough money to replace 80% of preretirement income, for example, speak in terms of the account balance. According to the book, "Your Money Ratio$," at age 65, an employee will need assets equal to about 12 times his or her final pay to maintain the same standard of living throughout retirement. This goal is easy to understand, and it's also easy to see the shortfall.
As an alternative, some plan vendors are converting an employee's accumulated account balance into a lifetime-income annuity. Either way, it's critical to show numbers that are meaningful to employees so that savings goals are clear.
3. Use proven marketing techniques to engage employees. A variety of marketing techniques can be applied to retirement savings program communication to influence better employee behavior. For example, create your communication strategy by identifying different employee groups based on their current plan behaviors and determining what you want each to do. Do you want them to join the plan, save more money or invest more appropriately? Once you know what behaviors you want, send targeted messages to each group to make it personal. Adjust messaging as needed, as employees' needs and goals change throughout their careers.
And, because people have different learning styles and prefer to receive messages in different ways, use a variety of media (print, online, email) to catch their attention. Reinforce messages regularly, and account for generational communication preferences by taking advantage of new media.
4. Get back to basics. A recent poll indicated at least one-third of American adults, an estimated 77 million people, give themselves a grade of C, D or F on their knowledge of personal finance. How can we expect employees to build a sophisticated savings and investment strategy for the future when they don't have the skills or the knowledge needed to make good financial decisions today?
In a survey of chief financial officers and other senior executives, 80% of respondents said that "financial literacy among employees was the most significant challenge they face in getting employees to participate in the company's 401(k) plan." By building on the natural link where income is earned and the skills needed to maximize the potential of that income, employers can provide basic financial education that includes strategies for both meeting today's financial challenges as well as saving for the future.
5. Introduce higher default percentages along with more aggressive communications. Despite the widespread adoption of auto-enrollment and auto-increase provisions in 401(k) plans, the average deferral percentage has declined over the past several years as employees tend to remain at the default percentages (typically 3%). In our review, we found few communications that position the default rate as the minimum introductory rate for those unaccustomed to savings and that explicitly say that most people should be saving substantially more. Sponsors need to marry an increased sense of urgency in their plan communications with more aggressive default enrollment/escalation rates in their plans.
With government balance sheets in tatters and employers' benefit dollars increasingly directed to health care costs, there is little chance for a magic-bullet solution to the approaching retiree income crisis. This will have to be solved primarily by individuals, and HR/benefits professionals should be sounding the alarm before it's too late.
Diane Leary is director of the communication practice, and Alan Vorchheimer is a principal in the retirement practice, at Buck Consultants.
5-point action plan
1. Build honesty - and urgency - into the message.
2. Show real numbers employees can understand.
3. Use proven marketing techniques to engage employees.
4. Get back to basics.
5. Introduce higher default percentages along with more aggressive communications.
