As of the end of March, retirement plan account balances reached $9.2 trillion, their highest level ever, according to the Urban Institute’s Retirement Policy office. That sounds like good news, but when adjusted for inflation, the statistic suggests that employees are still about 3 percent belowwhere they were in 2007, just before the stock market crash. The message is that most employees, with help from their employers, need to step up their game.
For many employees, an impediment to saving aggressively is the failure to think in specific dollar terms about what their retirement income needs will actually be. A recent survey conducted by the Society of Actuaries focuses on adults age 45 and older. The results show that of those that hadn’t retired, only 35 percent have an idea of how much they’ll need to spend in retirement — and where the money will come from. Those questions were also a mystery to 43 percent of current retirees.
How can employers motivate workers to think about retirement more concretely? And, how can they encourage workers to take full advantage of their retirement plan by maximizing their savings? Nevin Adams, the Director of Education and External Relations for the Employee Benefit Research Institute (EBRI) offers several reasons why everyone should get serious about retirement saving. Employers can present this list of reasons to staff members, as part of their retirement plan communications efforts.
1. You don’t want to work forever. While basic, the vision of working at age 75 can spur employees to action.
2. Living in retirement isn’t free. True, for most people, living expenses decline in retirement, but not by as much as many employees might expect. EBRI surveys suggest at age 75, household expenses are still 81 percent of what they were at age 65. And even as basic living expenses drop in retirement, health care expenditures rise, often dramatically.
3. You may not be able to work as long as you think. EBRI surveys have found that half of current retirees reported exiting the workforce sooner than they had anticipated because of health issues, disability or losing their jobs due to downsizing.
4. You don’t know how long you will live. A potential upside to higher expenditures on health care in retirement, living longer, can also be a downside financially if one expects to die at 85 but lives on another decade. (A man retiring at age 65 today has a 25 percent chance of living to 90.)
5. The sooner you start, the easier it will be. The power of compounding can do wonders for easing the burden of retirement saving. Retirement plan service providers are generally happy to illustrate with examples.
There are even websites that can help employees get a rough idea of what their future may hold in terms of longevity. Plugging in age, health status and other basic data yields some predictions on a site like www.livingto100.com.
EBRI’s “Choose to Save” initiative features a holistic yet streamlined online financial forecasting tool to give employees a general idea of the amount of capital they’ll need to retire. The Ballpark E$timate asks users to answer 16 questions. Employees using that system may need some guidance on some of them, such as realistic retirement savings investment growth assumptions.
The Perils of Borrowing
Even when employees are motivated to maximize what they put into their 401(k) plan, many then go backwards by borrowing against their account balances using plan loan options. While plan loans can help employees out in a financial crisis, they can also be abused, and often are. According to the Financial Literacy Center, 10 percent of plan loans end in default, forcing employees to incur penalties and lose assets. Employers can reduce the chance of loan defaults, according to the Center, by:
- Limiting employees to one loan at a time.
- Keeping the maximum loan size to, for example, 25 percent of the account balance instead of the more common 50 percent limit, and
- Allowing workers to repay loans even after they have changed jobs, since forcing loan repayment when the employee leaves the company causes the vast majority (80 percent) of employees to default.
As an employer, you have the opportunity to make a real difference in the lives of your workforce. It may be hard or impossible for them to envision retirement. By encouraging them to start now, you can help them put time on their side.