The Moving Retirement Target: Helping Your Employees Save During the Downturn
Projected Retirement Income
U.S. employees have seen their 401(k) balances plunge due to the financial turbulence of the past year. The gap between the money employees have saved compared to what they need to save to maintain their standard of living in retirement has significantly increased. Last year, Hewitt predicted that employees needed to replace, on average, 126 percent of their final pay at retirement, including future inflation and increases in medical costs. Most workers were on track to replace just 85 percent of their income. After factoring in the effects of the recent market downfall — where average 401(k) accounts decreased 18 percent during 2008 — a new Hewitt analysis shows that most workers are now on track to replace just 81 percent of their income. In other words, to replace what was lost in 2008, a typical 55-year-old employee with a 401(k) savings rate of 10 percent of pay will need to either save an additional 12 percent each year until age 65 or work for two more years. Even if employees are able to recoup their losses from the recent market tumble, projected retirement income levels are expected to fall short.
Even though budgets are tight in today's economy, employers should encourage their employees to take simple steps to maximize their retirement plan's earning potential.
Helping Your Employees Save
Stay in the Game. The total elimination of a 401(k) match may seem like a quick, short-term cost-saving measure; however, it conveys a message to employees that retirement savings can be turned on and off to meet short-term needs. Make every effort to continue to provide the company contributions, both matching and nonelective. Encourage employees to contribute enough money to get their full company match, and explain that failing to do so means they're leaving free money on the table.
Evaluate Allocation of Benefit Dollars. As cost-cutting pressures mount and employers seek to find "immediate" savings, there's a tendency to look at current benefit allocations (retirement, health care, paid time off, etc.) and make cuts within individual benefit categories. To reduce the pain associated with cost-saving measures, offer employees choices and ask for their input on how benefit dollars are distributed. Promote individual savings to bolster 401(k) accounts during this difficult economy.
Simplify and Automate Enrollment. Offer target-date funds and implement automatic contribution escalation at a minimal rate on an annual basis. Increasing contributions by just 1 percent a year can increase employee retirement savings by 50 percent or more. According to Hewitt research, about half (53 percent) of employers now offer automatic savings rate escalation in their retirement plans.
Emphasize Diversified Investment Portfolios. Help employees rethink their investment strategies. Attitudes toward risk and loss potential may now be very different than they were in early 2008. Educate employees on what it means to rebalance an investment portfolio. This is important in volatile market conditions. Help employees retool their vision of when they want to retire and how much income they may need to retire "comfortably."
Offer Retirement Planning Tools. Many employers offer services and tools to help employees make informed investment choices based on their particular needs. According to Hewitt research, 38 percent of companies offered online, third-party investment advisory services in 2008, and another 11 percent are very likely to add these services in 2009. In addition, 20 percent of companies currently offer managed accounts that allow employees to delegate the overall management of their accounts to an outside professional.
If your company must suspend the 401(k) match, which roughly 4 percent of large companies have done, encourage employees to maintain or increase their contributions to make up for the reduced company contribution. Providing a company match, simplifying and automating participation, offering retirement tools — these and the other actions outlined above are important steps that employers can take to help their employees save more and prepare for a financially secure retirement.