Top Three Things You Can Do to Help Your Employees Prepare for Retirement
The percentage of workers who felt “not at all” confident about having enough money to live comfortably during retirement has hit a record high. That’s according to the 2011 Retirement Confidence Survey (RCS) conducted by the Employee Benefit Research Institute and Mathew Greenwald & Associates. The 27% “not at all” response jumped from 22% in both 2009 and 2010. The “not at all” rate had been as low as 10% in 2007.
Workers know they’re not doing all they can to prepare financially for retirement. Fortunately, there are some things that you can do to help your employees feel more confident about their retirement prospects.
1. Increase deferral rates.
As a plan sponsor, convincing your employees to save a higher percentage of their income is the single most important step you can take to help them prepare for retirement. Auto-enrollment programs are a powerful tool for achieving this goal.
Higher deferral rates made more of a difference to 401(k) plans’ ending wealth than investment performance and even asset allocation, according to research conducted by The Principal. This was true even in the unlikely case that participants consistently invested in funds ranked in the top 25 percent by Morningstar.
2. Educate your employees.
Simply setting up a 401(k) plan isn't enough. You need to educate your employees about how much they really need to save for retirement. At least that’s what can be inferred from statistics on the gap between the amount people need for retirement and what they've actually saved in their 401(k) plans.
A mere $71,500 was the average 401(k) balance across 11 million Fidelity accounts at the end of 2010. This may sound big compared to your employees' salaries. However, it compares unfavorably with the estimated $740,000 “needed to deliver an annual income of $50,000 per year for 25 years, assuming a 5% rate of return and no inflation,” according to Morningstar.com’s “25 Shocking but True Statistics About Retirement.” Increase the inflation expectation to 5% and your employees will need to almost double their savings to $1.25 million to reach the same income goal, according to Morningstar.com.
3. Meet your fiduciary responsibilities.
You’re already helping by sponsoring a 401(k) plan. When you meet your fiduciary responsibilities, you can improve the odds of your plan participants achieving their retirement savings goals.
One of your fiduciary responsibilities is to pay reasonable compensation to your vendors. A 1% difference in annual fees?if Plan A pays 1% and Plan B pays 2%?can make a significant difference in your plan participants’ wealth upon retirement. In an era of 6% investment returns, the 2% annual fee would cut the participant’s final account value by a whopping 25.91% vs. only 12.31% for a participant paying annual fees of 1%. The participant paying higher fees ended up with almost $20,000 less. This data comes from a report prepared by the staff of the Joint Committee on Taxation for the U.S. House of Representatives Ways and Means Committee. Prudent investment choices can also make your employees' retirement savings less risky.
In a world where short-term thinking seems common, inspiring your employees to think about the long term is a valuable contribution. That’s even before you consider the value of offering a well-diversified, economically priced range of investments in an account with automated contributions. Add the incentive of an employer match and you've got a winning proposition for your employees, who will truly appreciate the efforts you make to help them prepare for a secure retirement.