5 financial health design principles for workplace retirement plans

Much ink gets spilled every year on the state of Americans' retirement security. Recent headlines have touted the record-high savings rates in 401(k) plans. Reading these, it's easy to assume that all is well for retirement savings and people are saving in ways that will help them be secure.   

The problem, however, is that these headlines obscure reality. Most of the savings rates that are shared publicly are based solely on people who are already participating in employer-sponsored retirement plans.  

Nearly half of the U.S. workforce lacks access to an employer-sponsored retirement plan.  Additionally, a 2024 AARP survey found that 1 in 4 adults over the age of 50 have no retirement savings. So when you take into account the tens of millions of people with no access to or savings in an employer-sponsored retirement plan, it is clear that all is not well. 

At its core, the retirement savings challenge is one where we have a collective problem: We need a secure retirement for the years we live after earning income, and yet the retirement system currently relies heavily on individuals to solve it on their own. As retirement shifted away from defined benefit pension plans (that guarantee a payout for life) and migrated to defined contribution plans that place more of the financial and savings burden on individual workers, this has only increased the challenges many workers face.

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This unresolved tension is coming to a head as the first generation dependent on defined contribution retirement plans enters retirement age (nearly 11,000 Americans turn 65 every day). In a post-pension world, this 40 year experiment with the 401(k) has resulted in a very mixed bag for Americans.  

There are many parts of the retirement savings ecosystem that have to be addressed by policymakers to help Americans have a secure retirement — from how a living wage is calculated (the ability to afford essential expenses) to Social Security. However, there are also some basic changes that employers can undertake themselves to improve access to retirement savings plans. 

Five financial health design principles for retirement plans

A few simple, common-sense changes on the employer side could help expand access to and improve retirement outcomes for millions of workers.

• Eliminating waiting periods to expand 401(k) access: Shortening waiting periods for 401(k) enrollment is a proven strategy to increase participation and improve long-term financial security for workers. For many lower-income or frontline workers, this earlier access can be a critical step toward achieving greater financial stability, enabling them to build savings gradually, take advantage of compounding interest, and benefit from a more secure retirement. As an example, Target expanded access to the company's 401(k) plans by reducing waiting periods, allowing employees to save sooner.

• Expanding access to part-time workers: Part-time and seasonal employees frequently lack access to employer-sponsored retirement plans. Expanding eligibility to these groups is a critical step employers can take to enhance overall workforce financial security. For instance, Starbucks offers 401(k) benefits to part-time employees who work at least 240 hours over three consecutive months, with a dollar-for-dollar company match on the first 5% of their eligible pay.
  

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• Auto-portability: This refers to automating the transfers of retirement account balances when employees change jobs. There are roughly 16 million orphaned retirement accounts and the vast majority of those are held by low to moderate income workers. By simplifying and automating rollovers into new plans, auto-portability minimizes the risk of cashing out or abandoning accounts, preserving savings and avoiding rollover penalties. New fintechs, such as Manifest, automate this process with no costs to employers, making auto-portability a no-brainer.

• Unconditional employer contributions: Most retirement plans have contribution schemes that are conditional upon the employee making contributions. These matching formulas, however, often benefit high-income earners and widen the gaps for lower- and middle-income households. One way employers can address this is to provide an unconditional match, regardless of the employee making contributions. For example, auto-enrolling workers with a guaranteed 3% match can allow workers to start building savings (employers could still have an additional matching formula based on employee contributions).  
  

As a practical matter, this can help workers start on their retirement journey even if they are living paycheck to paycheck, and help close the savings disparities across key demographic populations.

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• Offering financial guidance to support retirement readiness: Personalized financial guidance can help improve workers' retirement readiness — particularly when paired with support for short-term financial needs. Recent estimates find that holistic financial advice could unlock more than $4,000 of value per year for households. Many employers also provide retirement planning programs to help older workers make informed decisions, such as the optimal age for retirement.
  

While these changes won't solve all the challenges facing America's workforce, these financial health-design principles can help make meaningful progress on closing the gap so that every worker in the U.S. has a secure retirement.