Designing Your Company Retirement Plan to Reduce Employee Financial Stress

by Jason Day, Senior Client Manager

 

A number of studies have shown that employees are becoming increasingly stressed about saving for retirement.  As a result, a recent survey of plan sponsors has indicated that helping employees successfully prepare for retirement is now the number one concern for many plan sponsors[1].  As advisors working with retirement plan sponsors and participants, we see firsthand the negative impact that financial stress creates in the workplace.

 

  • 70% of retirement plan participant’s state “money for retirement” is their top financial concern[2]
  • Financial stress is the #1 cause of stress-related illnesses[3]
  • 84% of employees report having some degree of financial stress[4]
  • 24% higher healthcare costs in people who are stressed about finances[5]
  • 89% of workers are not confident they will have enough money to retire comfortably[6]
  • Almost 50% of workers have less than $25,000 saved for retirement and 24% have saved less than $1,000[7]
  • 70% of human resources professionals say financial problems impact employee performance[8]

 

We believe that some of the financial stress experienced by employees is the result of a retirement plan industry that has shifted over the years from a defined benefit model to a defined contribution model.  In the current defined contribution world, the burden to save for retirement has been placed squarely on the shoulders of the employee to save for their own retirement.  The initial focus of many retirement plan sponsors to help prepare their employees for retirement was to increase plan participation and deferral rates by educating employees about the benefits of plan participation.

Well-intentioned plan sponsors offered group meetings and educational materials designed to drive an employee to take action.  The thought was to teach employees the benefits of enrolling in the plan as well as the benefits of increasing their contribution rate and employees will take action to save more.  While this approach moved some to take action, the reality is that most employees need more help and an easier solution.

At Oswald Financial, we believe that a retirement plan designed with automated plan features is a great way to help employees overcome their tendency to delay decisions and seek to dramatically improve employee retirement readiness.  We work with plan sponsors to design and implement a retirement plan that makes it easy for employees to save more and aim to ultimately reduce employee financial stress.  A few of the features we commonly implement include:

 

  • Automatic enrollment in which new employees are automatically enrolled in the plan at a default contribution rate (with the ability to “opt out” if they choose)
  • Automatically enroll non-participants or “low contributors” at a default contribution rate (with the ability to “opt out” if they choose)
  • Adding an “auto escalation” feature in which employee contributions are automatically increased 1% per year
  • Re-enrollment of plan participants into an age appropriate target retirement date fund
  • Stretching the company match

 

While some plan sponsors may be reluctant to implement automatic features out of fear that employees may react negatively, keep in mind that employees are provided with the option to “opt out” of the automatic enrollment.  Our experience tells us that 92% of employees who are automatically enrolled do not opt out and 68% of employees support automatic features.[9]  These automatic options help employees start their retirement savings earlier and help alleviate financial stress along their road to retirement.  At Oswald we will work with you to determine the appropriate automatic enrollment rate for your employees and whether to add an auto escalation feature to your plan.  With the auto escalation feature employees who are automatically enrolled have their contribution rate increased by 1% each year helping them to save more.  Another option that strives towards creating successful retirement outcomes is re-enrolling plan participants into an age appropriate target retirement date fund.  This strategy

ensures that plan participants have a properly diversified investment portfolio that is managed to become more conservative as they near retirement age.  Finally, “stretching” the company match is a way to help your employees save more for retirement.  This works by changing the plan’s company match formula to encourage higher contribution rates by employees.  As an example, instead of matching 50% up to 6% consider matching 25% up to 12%.

 

In closing, we believe your retirement plan is an important benefit that if designed properly is a great way to help your employees aim to become less stressed and more financially secure.  We would love to have the opportunity to review your current plan and offer best practice plan design solutions.

 

If you would like additional information please contact Oswald Financial at 216-367-8588.

 

[1] Fidelity Investments Plan Sponsor Survey 2018

 

[2] Stress to Security : Insights from a Retirement Readiness Survey conducted by The Standard 2018

 

[3] Research Works: Partnership for Workplace Mental Health report, Feb 2009. More recent data may alter these results.

 

[4] Q2 Trends in Employee Financial Issues, Financial Finesse, September 2012. More recent data may alter these results.

 

[5] Higher Health Care Costs for Metabolic Syndrome Risk, Disabled World, September 2009. More recent data may alter these results.

 

[6] Principal, Retirement Readiness Participant Survey, Jan. 2017.

 

[7] 2017 EBRI Retirement Confidence Survey. Amounts exclude the value of a worker’s primary home and any defined benefit plan.

 

[8] SHRM 2014 “Financial Wellness in the Workplace Study”. More recent data may alter these results.

 

[9] Stress to Security : Insights from a Retirement Readiness Survey conducted by The Standard 2018