401(k)s and other defined contribution (DC) plans can help Americans better prepare for a comfortable and financially secure retirement. However, too many people do not regularly set aside enough money to take full advantage of these savings vehicles, something which has become a concern for a growing number of employers. For example, an earlier study by SEI found that 88 percent of surveyed plan sponsors believe participants must contribute more to their DC plans, not surprising since 84 percent expressed doubts that employees will be able to afford to retire on time (ages 62-65) given their current savings rates.
Employers are of course interested in the financial well-being of their workers, but businesses are also motivated to prevent delayed retirements because of the potential impact on the company’s bottom line. Indeed, another 88 percent of surveyed plan sponsors said that they fear workers postponing retirement would adversely affect their business, including 77 percent that are worried firm-wide healthcare costs could go up due to employees not being able to retire at a traditional age. Sixty-three percent of respondents cited similar concerns that having to maintain a larger proportion of older (higher-compensated) workers would prove to be a substantial expense for their company, and 64 percent are worried their organization’s level of young employee turnover could be hurt.
Moreover, 43 percent of employers are concerned that a delayed retirement trend would lower productivity because younger workers might be disgruntled from the absence of upward mobility, and 44 percent acknowledged that older employees could lack motivation if they preferred to already be retired at this stage in life. Some of these fears appear warranted because a new report from Financial Finesse showed that the cost of delaying retirement by just one year can exceed $50,000 per worker due to age- and tenure-related differences in wages, insurance, retirement benefits, paid leave, and other employment expenses. Further, the estimated annual hit from only a 1-year increase in a workforce’s average retirement age can equal 1.0%-1.5% of a business’s total employment costs.
When asked about what changes must be made in order to increase the likelihood of employees having the necessary savings to retire on time, the most frequently cited responses in the SEI survey behind boosting 401(k) plan contributions included educating participants about investing and the importance of having additional savings on top of what was already being set aside in their DC plans. More than a fifth (21 percent) of surveyed sponsors also said that they believe incorporating a re-enrollment process could increase the likelihood of their employees having the necessary savings to retire on time, and more than a third (36 percent) said it was “likely or somewhat likely” they would conduct a re-enrollment in the next twelve months.
Sources: SEI Investments, Financial Finesse, Prudential Financial
Post author: Charles Couch