Guest Article

Best Practices for Evaluating Employee Retirement Preparedness

By Liz Davidson, founder and CEO of Financial Finesse.

Employers are increasingly concerned about the costs of delayed retirement and rightly so. But before they can even begin to project the costs they will face as a company due to employees postponing retirement, they must first determine their employees' overall retirement preparedness. Namely, what percentage of employees are on track financially to retire by normal retirement age and what percentage will most likely have to postpone retirement by 1, 3, 5, and 10 plus years?

Only by knowing these numbers can companies begin to calculate the costs of delayed retirement and establish plans and goals to improve employees' retirement preparedness so fewer employees need to delay retirement, and those that are forced to delay end up postponing for a couple of years instead of a decade or more.

The first step in evaluating your employees' retirement preparedness is to examine your retirement plan data. All retirement benefits managers should review numbers on a quarterly basis, with a formal retirement preparedness analysis presented to the investment committee on an annual basis.

Below are the key retirement plan metrics that retirement benefits managers should benchmark in their quarterly and annual plan reviews:

Average balance: The median 401k balance is approximately $60,000 and the average plan participant is 42 years old. If you assume an average salary of $50,000 and an average deferral rate of 5.5%, at a 6% rate of return the average 401k participant will have $358,424 in retirement plan assets by age 65. Most employees will need 15.7 times their final salary, according to a study by Hewitt, so, consider that in your analysis to determine whether or not your employees are on track. You can use a simple retirement planning calculator to determine where your company stands.

Once this calculation is done, it's important to look at the average balance, broken down by age ranges, so that you can get a clearer picture of retirement preparedness for different employee age groups. Pre-retirees will have to make more dramatic changes than younger employees to catch up, and will require much more significant financial education and financial planning assistance so they are the most important group to study.

Your job does not end with the pre-retirees; it's just as important to evaluate the preparedness of your younger employees. Getting them to save adequately and invest appropriately is the key to preventing a future retirement crisis. If you ignore your younger employees, you'll be in crisis mode forever, working feverishly to help pre-retirees catch up while younger generations continue to fall further and further behind because they don't get the education and support they need to make proper saving and investing decisions.

Average deferral rate: Most financial planners recommend employees defer 10-15% of their salaries into their company's retirement plan as a rule of thumb. If your company has a generous match or offers a defined benefit plan to employees, 10% is sufficient. If, on the other hand, you don't have a match or a defined benefit plan, then 15% is a better target. The average participant deferral rate is approximately 5.5%, far below what most planners recommend employees save in order to retire comfortably at normal retirement age.

To improve deferral rates, consider increasing your automatic deferral into the plan if you have auto enrollment. Also consider adding an auto-escalation feature where employees can opt to automatically increase their retirement plan deferral rate by a set percentage each year up to a maximum amount. If you have this feature, make sure to heavily promote it in all plan communications and ask that your plan provider and/or retirement education firm do the same whenever they conduct workshops or on-site retirement planning sessions for employees.

Also, the number one reason that employees do not defer more into their retirement plans is that they cannot afford to do so. So, if your deferral rate is lower than it should be, provide employees with ongoing money management education so that they develop the skills to better manage their expenses, reduce their debts, and free up money to save for retirement. These programs have a high success rate when they are deployed as an additional employee benefit, with over 93% of employees making changes to improve their finances within 30 days of the education.

Asset allocation: Assets should be allocated across asset classes in reasonable fashion based on generally accepted financial planning guidelines. A 60/40 equity/fixed income split across the investments in your funds would fall within an acceptable range. If 80% or more of your plan's assets are invested in equities, especially if you have a large percentage of pre-retirees, your employees are probably investing too aggressively. On the other hand, if you have a significant percentage of assets in the stable value fund (we've worked with plan sponsors who've had 40-50% of their plan assets in stable value investments), employees are sitting on the sidelines and their portfolios are unlikely to grow sufficiently to provide an adequate retirement nest egg. In both cases-too much risk or too little-employees are putting their retirement in jeopardy, and both they and their employers pay the price.

To improve asset allocation, take a multi-pronged approach, combining print materials and online tools with workshops, one-on-one financial planning sessions, and phone-based financial coaching. Our research shows that over 50% of employees have never taken a risk tolerance quiz, despite the fact that virtually all plan sponsors offer these quizzes to their employees through their plan providers. Even more concerning, 65% of employees are uncertain that their asset allocation is appropriate for their situation and 66% never rebalance their portfolios. Even highly reputable online asset allocation tools like Financial Engines reach a relatively small percentage of employees-typically around 20-25% at most.

The only way to ensure all your employees have the ongoing support they need to make informed investment decisions with their retirement plan assets is to provide multiple channels for them to access the information in a personalized, confidential manner, and on an ongoing basis.

About Financial Finesse

Financial Finesse was founded with a single mission: Provide people with the information they need to become financially independent and secure. Today, we are the leading provider of unbiased financial education for large companies and municipalities. Our financial education services are fully integrated programs designed to address the strategic goals of the organizations we service and are delivered by on-staff CERTIFIED FINANCIAL PLANNER™ professionals as an employee benefit. If you are interested in learning more about workplace financial education programs, contact one of our education consultants at AskFF@financialfinesse.com.

The Ask Financial Finesse Q&A service is designed to provide general information on trends and developments in workplace financial education programs and participant education strategies. Due to the complex nature of financial benefits and/or workplace financial issues, the information contained in this document is not to be construed as advice.

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