My conversation with Hugh O’Toole of the Viability Advisor Group got started with a bang, right out of the gate he said that his goal is to ensure that employee and employer goals in a 401(k) plan align. Below are my notes from our very informative conversation!
Hugh commented that HR has generally supported the concept of retirement readiness to ensure that employees are able to make a timely and successful transition into retirement, the finance side of organizations have struggled with how that benefits the employer.
Hugh and his firm are pursuing the financial argument for why having employees who are able to retire in a timely fashion creates a financial benefit for the employer.
An employee who is “Retirement Ready” is generally able to replace 75% of their pre-retirement income in retirement.
The biggest obstacles to employees achieving retirement readiness are not different than some of the challenges that companies have had over the years in maintaining defined benefit plans are:
Adequate funding, or contribution level
Investment allocations/risk levels
Best way to improve retirement readiness is to have all parties at the employer aligned and understanding that this is a critical aspect of organizational health. Keys to success are:
Get agreement that this is the right thing to do
Use the employer’s current data on their retirement and healthcare data to create a specific financial argument of how job locked employees impact organizational costs.
Compare differences in marginal costs between an older worker and a younger worker.
Once specific data is crunched, it becomes much easier to align the organization around this concept.
Employer liability for job locked employees can be mitigated without raising employer costs. Strategies include:
Taking advantage of behavioral finance techniques.
For companies that have declined automatic enrollment in the past, but want to revisit, the following work in your favor:
The industry now has data to support the high stick rate of automatic enrollment
Specific case studies by industry are available
Show that improving participation and contribution rates will positively impact both employees and employers by using their specific data to show the impact on the financial statement of the employer.
In terms of employee retirement age, is age 70 the new 65 when it comes to retirement:
The workforce is definitely aging
There is nothing wrong with an aging workforce
However, the employee who does not have their hand, heart and mind in their job, add to wage costs, healthcare premiums, workers comp, productivity levels and overall risk.
The goal should be to help employees reach retirement age and have the option to make the transition into retirement, or continue in the workforce on a voluntary basis as positive contributors to the organization.
Employees spending more time in the workforce to make-up for a savings problem is not always an option.
Financial wellness is a broad topic employers are starting to tackle. This means dealing with debt, college education, long-term care, elder care, budgeting and other issues.
Overview of a specific case study where a trucking company deployed financial wellness to help address financial stress with their truck drivers:
Used loans and hardships as a leading indicator or warning sign of financial stress
Deployed aggressive financial wellness solutions for drivers taking loans or hardships
As a result they had safer, less distracted drivers who have fewer accidents
Each avoided accident saves $500k for the company
Is it right for the employer to expand their benefits offering into financial wellness? Is that too intrusive into the lives of employees? Hugh’s perspective, if not at the employer then where? How will the average employee get access to this information if not through their employer?
The challenge with an aging financially unprepared workforce is every employers problem. As turnover generally does not happen as frequently after the age of 40. Improving employee retirement readiness does not have to cost the employer money. If it does, there are ways to calculate the return on investment (ROI).
You can get ROI just from plan design, aligning the risk structures in your target date glide paths and employing behavioral finance techniques without increasing employer costs.
Alternatively, if employers are contemplating reducing a match or employer contribution, it can be used to help outline the long term consequences on retirement readiness.
The number 1 job of the CFO, is to ensure the employer is still in existence, and the employees have jobs! Great insight!
Human Resources teams can use wage, healthcare, productivity and presenteeism numbers to create a financial argument to discuss with the finance side of the organization to help align the organization around creating better retirement outcomes for employees. There is a financial alignment between what is good for the employees and the employer.
As the benefits landscape continues to shift and more employee dollars are being spent on healthcare, dental, vision, retirement, etc. it becomes more important than ever to help employees understand the best way to maximize the deployment of their income to pay for the appropriate benefits.
New thinking in 401(k) plans:
For lower paid employees, Social Security will largely cover a majority if not all of their income replacement in retirement.
However, they are likely at greater risk that if they are unable to work or out of a job, their families could be at extreme financial risk prior to them reaching retirement age.
Breaking down the silos in the benefits world between health, retirement and voluntary benefits is more important than ever.
Based on actuarial data, each employee has a different hierarchy of needs.
Potential future benefits design could involve 401(k) plans where employees making less than $50k or over $150k are carved out of the 401(k) and offered different benefits for retirement.
Closing thought, employers need to take more steps to help ensure employees are able to either retire in a timely fashion, or have the choice to remain in the workforce as a productive contributor to the organization.