In a recent report, the National Association of Government Defined Contribution Administrators, Inc. shared some retirement statistics that paint an alarming picture of most Americans’ state of retirement readiness. I have shared four of the more troubling statistics below, and then outlined four quick, low-cost solutions you can implement to help your employees.
1. More than 75% of workers don't believe they will have enough money in retirement. Most Americans are passing through their working lifetimes with the belief that their retirement days are going to be difficult, not something to look forward to.
2. Nearly half of American workers have no retirement savings. Unfortunately, looking at the portion of Americans that have saved something doesn't yield a better picture. According to some estimates, the median retirement account balance is only $3,000 for working-age households and only $12,000 for households approaching retirement.
3. Funding 20 years of retirement. Most workers will probably retire at or before age 65. That means they will have 20 years or more of retirement to fund. Given that most Americans haven't saved enough to fund even one year's worth of retirement, this is a major problem.
4. Each retiree will need at least $220,000 for health care. This will only pay for out-of-pocket medical costs. It doesn’t include long-term care costs or healthcare premiums and is likely to grow as retirees live longer and health care costs rise.
What employers can do
1. Change the way you educate. Employee 401(k) education over the years has been remarkably unsuccessful. American workers wouldn’t find themselves in such a dreadful state of unpreparedness if even a small portion of the education they received resonated with them. So try something different. Many progressive employers are coupling employee 401(k) and financial wellness education in an online format of 10 to 15 minute downloadable modules. There are many advantages to online, on-demand education. Give it a try since it is likely that whatever you have been doing is not working.
2. Eliminate leakage. The quickest and easiest thing employers can do to protect employees from themselves is to eliminate all loan and withdrawal options from their 401(k) plans. For many employees, it is just too tempting to view their 401(k) plan account as a savings account.
3. Automate savings. Most studies show that employees need to save at least 15% into their 401(k) accounts each year. You can help them through auto enrollment and auto escalation. Auto enroll all new employees at 5% and escalate everyone 1% higher each year until they reach 10%. Re-enroll everyone who isn't in the plan each year and map anyone you auto enroll into the appropriate target date fund.
4. Provide investment advice. I believe in three years nearly all 401(k) plans will offer some form of participant investment advice. Many recordkeepers offer this service now, some for free. This is another way of protecting employees from themselves. Bad investment decisions are a major reason most participants aren't on the road to retirement readiness.
There is a lot of room for improvement in the average American workers state of retirement readiness. Don't be afraid to be a disrupter and radically change your 401(k) retirement program.
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