"With the effect of the financial crisis and emerging regulatory trends, we are starting to see heightened interest from employers who want to step up their efforts to help employees prepare for a secure retirement," added Mullaney.
Income for Life: Employees’ Desires Not Yet Supported By Employer Offerings
With the emergence of defined contribution plans as a primary, rather than supplemental, workplace retirement vehicle, responsibility for securing and maintaining income in retirement has fallen squarely on many employees’ shoulders. As a result of the recent market volatility affecting 401(k) plans, the need for guaranteed income that lasts a lifetime has become much clearer, yet there is a significant gap between what employers are doing versus what employees would like.
Many employees are very interested in creating a guaranteed income stream for life – more interested than most employers realize. Half of surveyed employees of all ages (50%) express a strong interest in their employers providing ways to convert retirement plan lump sums into income for life. On the other hand, only 21% of surveyed employers express a strong interest in having their company provide solutions that accomplish this goal. In companies with over 500 employees, employee interest spikes to nearly 60%, and the greatest disconnect is in companies with 500 to 5,000 employees that offer only a defined contribution plan. In all cases, there is at least a 20-point differential between employer and employee interest in adding guaranteed income elements to defined contribution plans.
While few employers (16%) indicate that they currently offer annuities and most do not yet view a guaranteed income feature as a priority, 13% would consider offering annuities as a distribution option for their defined contribution plans.
"Heretofore, many plan sponsors indicated that they understood the value of annuities but that their employees weren’t necessarily voicing an interest. Clearly, with the significant drop in the value of many retirement portfolios, we are hearing a rallying cry from employees for help in rebuilding and protecting their retirement savings," said Robin Lenna, senior vice president for MetLife’s Corporate Benefit Funding group.
Retirement Education: Misalignment Between Offerings and Awareness
A second area of employee/employer misalignment is with regard to retirement education. Employees have a growing appetite for advice and guidance specifically in retirement planning – offered through the workplace. More than half of all surveyed employees are interested in receiving retirement-related advice in the workplace. This desire has understandably increased in the current economic conditions, especially among older workers. Fifty-one percent of all workers – and 55% of older boomers – indicate an interest in access to financial planners for retirement through their employers – up from 44% in 2007 and 29% in 2006.
Recognizing the importance of advice in helping participants build retirement security, the Pension Protection Act and related regulatory projects demonstrate the importance of clarifying the guidelines for offering investment advice to plan participants. Employee interest in advice generally in the study points not only to the opportunity for employers to make retirement or financial advice available to employees, but also the opportunity to build appreciation and utilization of this benefit through better education. Despite this, only 37% of employers indicate they have a strong responsibility to help their employees in this area, and they may be overestimating their employees’ ability to manage their individual account plans. Even after the significant focus on this issue over the past two years, only 30% of employees strongly agree that they are able to make good financial decisions.
For those companies that provide retirement seminars at the workplace, they are not necessarily reaping the rewards for doing so; more employers report offering programs than employees report awareness of them. Mid- and large-size companies have the biggest gap between retirement seminar offerings and awareness, with 55% of companies with 5,000-9,999 employees reporting offering seminars, while only 40% of their employees are aware of them. For companies with more than 10,000 employees, the chasm is even wider with 63% of employers offering seminars while only 45% of their workers are aware of them.
Employees’ Need to Delay Retirement May Conflict With Workforce Realities
The very notion of what it means "to retire" has also changed in light of the financial crisis, and as a result, more employees are looking to the workplace for delayed retirement or post-retirement employment opportunities. While much attention has been paid in recent years to the effects of a once anticipated mass Baby Boomer exodus from the workforce, recent economic circumstances have flipped that dynamic on its head. More and more Americans may want to work past traditional retirement age, but in light of the current economic situation it’s not at all clear if employment opportunities will be available, especially in the short term as companies grapple with the current economic slowdown.
The closer employees are to the traditional retirement age, the longer they anticipate they will continue to work. For example, while more than half of employees 21–30 years old say they plan to retire by age 61, that figure drops to only 15% among those who are now ages 51–60. As many of the older Baby Boomers who have already reached “traditional” retirement age are planning to stay in the workforce, and younger Baby Boomers face increasing needs to address their own financial security, they too may seek to remain in increasing numbers.
Employees Spooked by Economy, But Will They Take Control?
The current economic crisis has spawned a crisis of confidence among employees who are struggling to save and plan for retirement; 58% of employees are very concerned about having adequate retirement income due to stock market volatility, and only 39% are very confident in their ability to make the right financial decisions for themselves and their families. In August 2008, only 28% of employees surveyed said they had achieved or were on track for achieving their retirement savings goals. By November, that percentage had fallen to 21%.
The economic crisis has served as a "wake up call" for many employees, with almost half (46%) reporting that the economic events of the past few months made them realize they need to take more control of their retirement savings. More than half (56%) have now taken steps to determine their household’s needs for retirement, up from 54% in 2007, and roughly four in ten (39%) workers now have a formal retirement savings plan, up from three in ten (30%) in 2007.
Action Plan for Employers
Employers may be missing a valuable opportunity to address employee loyalty and retention – the number one benefits objective for employers, according to the study – by designing benefit plans that help their employees meet their retirement goals. Employees clearly need the help. Though 62% of employees were prompted by the economic crisis to review their retirement savings plans, the majority of employees didn’t make any changes – indicating that employees may not be equipped with the tools, knowledge or options to take action.
"Fortunately, new legislation and regulations are seeking to make it easier for employers to help meet the retirement security needs of their employees," added Lenna. "While a return to traditional defined benefit plans is out of the question for most employers, there is a valuable and important role for them to play in helping their employees ensure that they have income for life and protection for their future, especially as defined contribution plans gradually incorporate more and more defined benefit type features."
The challenge of rebuilding retirement security may seem very complex, but there are practical steps in both plan design and communication that sponsors can take now to help begin addressing this critical employee need, even as public policy discussions continue to shape the future of qualified retirement plans. Some of these include:
- Consider implementing automatic enrollment and automatic escalation programs to encourage saving and overcome employee saving inertia.
- Consider adding income annuities as an allocation, partial 401(k) distribution option, or both inside the plan.
- Explore opportunities for providing flexible programs geared to an older workforce by instituting phased retirement and return-to-work programs.
- Provide education to help employees realize and prepare for the costs associated with retirement, as well as how to create guaranteed income for life. Recognize that there may be an appetite for this type of information earlier than traditional "pre-retiree" ages.
- Communicate the benefits that are important to encourage participation such as employer match, advantages of dollar cost averaging, and tax advantages.
- Offer retirement education programs that help employees realize and prepare for the costs associated with retirement such as healthcare, prescription drug cost, and long-term care.
- Encourage employees to develop healthier lifestyles earlier in life to reduce future healthcare costs in retirement.
- Follow and actively participate in the emerging national debate about retirement security and retirement program design.
- Design programs to help ensure that your retirement programs will best fit the needs of your workforce as well as your company’s benefits and financial objectives.
