Plan Sponsors Can Do More to Improve Employee Retirement Readiness

JANUARY 19, 2021

Many companies worry about their employees’ long-term financial security, particularly whether they are saving enough for retirement, but surprisingly few organizations have built retirement plan offerings that sufficiently address these challenges.

According to recent national studies, 78% of employers feel responsible for helping employees with sustaining assets through retirement. This has surged from 33% in 2012. This upsurge shows us that employers understand the importance of retirement readiness and financial wellness in retaining and attracting employees.

While helping employees save for retirement is employers’ top concern, their next biggest concern is planning for healthcare costs. This is reflected in employer financial wellness plans. In 2013, 38% of reported financial wellness plans covered this topic. In 2020, that number increased significantly to 71%. Experts note that the aging workforce is impacting rising healthcare costs, as older employees have a higher rate of benefit usage than younger employees. Research conducted by Prudential revealed that for each individual who cannot afford to retire, employers pay an incremental cost of more than $50,000 a year.

Employers’ concern aligns with those of plan participants. A 2019 survey conducted by the National Association of Personal Financial Advisors (NAPFA) found a pessimistic view of retirement among respondents, with 74% saying they want a financial planning "do-over." In fact, only 68% indicated that they are on track to retire at all.

Improving Retirement Outcomes

The startling statistics on retirement security are driving plan advisors to develop tools and strategies that help employers maximize the effectiveness of their retirement plans. These strategies include providing access to better investment options, as well as automatic plan design enhancements, derived from behavioral finance theory.

For instance, USI Consulting Group (USICG) has long leveraged its behavioral finance expertise to help plan sponsors make better-informed decisions regarding the design and management of defined contribution plans. Critical decisions such as implementing automatic enrollment, and selecting the appropriate contribution rate and default investment vehicles for plan participants, are made with the guidance of behavioral data.

Recently, the USICG team worked with a multi-location luxury goods retailer to increase 401(k) enrollment, which appeared to have a hit a plateau at 64%, by applying behavioral finance strategies. The team recommended implementing automatic enrollment, which placed employees in a default investment at a default rate unless they explicitly elected otherwise. Through this strategy, employee participation surged to 98%, a 34% increase.

In addition, the team recommended automatic escalation, which increases a participant’s deferral rate by a set percentage each year up to a specified cap. The goal is to encourage plan participants to save early so they avoid missing out on their projected monthly income. The combined strategy of automatic enrollment and escalation dramatically improved participants’ savings rates.

Plan Sponsors Can Do More

Despite the efforts to help companies improve retirement savings, many plan sponsors have yet to take advantage of the various strategies and tools to improve employees’ retirement outcomes. For example, one survey noted that 43% of plan sponsors have not analyzed workforce demographics to maximize the benefit of the retirement plan.

According to USICG, plan sponsors can significantly improve participants’ retirement readiness by working with their advisors on effective engagement, communication, and cost management strategies. When implemented correctly, these strategies can help participants double their savings rate and increase their average account balance by up to 50% in the first year.

To learn more about USICG solutions and strategies to maximize retirement savings, contact your USICG representative.