Bolstering Retirement Benefits to Recruit, Retain and Reward Workers

Employers would be wise to boost retirement and financial security benefits in light of the labor market shifts prompted by the COVID-19 pandemic. 

Companies grappling with worker shortages resulting from the pandemic may be able to help resolve this struggle by offering workplace benefits that account for the future, including retirement plans.

“In this market, it’s going to really require thinking directly about what your benefits are, beyond just what’s traditionally served with health care,” explains Jessica Baehr, head of group retirement at Equitable. “This is a way for [plan sponsors] to differentiate in the marketplace, beyond just wages.”

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With falling unemployment and increased job growth, 67% of small business owners are currently experiencing a staffing shortage, according to a March 2022 survey from the National Federation of Independent Businesses. Additionally, Lincoln Financial Group’s Small Business Owner Survey shows that 80% of small business owners view employee benefits as a top priority due to the effects of the  pandemic, 93% have reevaluated their strategy and plan to make changes due to COVID-19 and 28% of owners have bolstered benefits to attract and retain talent. According to the survey, 30% of small businesses are adding life insurance and 27% are adding a retirement matching contribution, financial wellness program and/or retirement account. Other considered additions include accident, critical illness, vision, dental and other insurance benefits.

As labor markets have undergone wrenching shifts stemming from the pandemic, some employers have increased wages, but businesses are also faced with the challenges of rising inflation and supply chain disruptions.

This comes amid workers’ increased focused on securing retirement benefits and financial wellness resources.

“People are struggling with the concern that they’re not going to have the resources they need to live the life they envision for themselves [in retirement],” Baehr says. “This is where being able to not only offer competitive [retirement benefits], but also to come to the table with other ways that small businesses can demonstrate they’re investing in their employees, is a core differentiator to really attract talent.”

Working with a retirement plan adviser, retirement plan consultant or recordkeeper can help the plan sponsor understand what retirement benefit arrangement is best for employees, owners and the company bottom line, she says.

“Working with an adviser can really help them to understand what their options are, and what makes the most sense,” Baehr explains. 

Small businesses often don’t offer retirement benefits because of the cost and the administrative burden, according to Baehr. She advises small businesses to examine all the options available, and says that there are some that can provide the flexibility needed to offer a retirement plan without passing costs on to customers or reducing headcount.

According to the Lincoln survey, 51% of small businesses report weighing the costs and benefits that a plan would provide as a primary consideration, while 28% cite administrative concerns. Baehr notes that administrative costs for retirement plans have decreased thanks to new entrants to the provider market, however. The survey also found that 72% of respondents said that multiple employer plans, including pooled employer plans, are appealing. 

Plan sponsors can shop for many options, including SIMPLE 401(k) plans, simplified employee pension individual retirement accounts and profit-sharing plans, Baehr says. They should start by examining the needs of the company’s employees and the resources that could be brought to bear, which is a challenge for small businesses because many don’t have a dedicated or large in-house HR department, she explains.

With many types of retirement offerings available, there exists a match for almost every plan sponsor’s needs that will satisfy employees’ desire for a plan, according to Baehr.

She also says that profit-sharing arrangements offer greater flexibility and may be preferable for some small businesses, because they are based on company performance.

“An annual profit share gives some flexibility, but it also enables [plan sponsors] to reward employees when things are going well,” Baehr says. “Another opportunity is that you can reduce the cost by offering match that doesn’t vest for a few years out, [which is] another way to not only invest in employees’ long-term financial security, but also create some retention opportunities.”

Target-Date Funds Continue to Be Popular Among Younger 401(k) Plan Participants

Research on 2019 dataset from EBRI/ICI database finds the bulk of assets overall were invested in stocks.

More 401(k) plan participants held equities at year-end 2019 than at year-end 2007—before the financial market crisis—and most had the majority of their accounts invested in equities, based on an updated joint study released today by the Investment Company Institute and the Employee Benefit Research Institute.

The study, “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2019,” found that among participants in their twenties, 54.1% of their 401(k) assets were invested in TDFs at year-end 2019, compared with 28.8% among participants in their sixties. In the year studied, 31.3% of 401(k) assets in the database overall were invested in target-date funds, up from 26.6% at year-end 2018.

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On average, at year-end 2019, 68% of 401(k) participants’ assets were invested in equity securities through equity funds, the equity portion of balanced funds and company stock. Twenty-nine percent of assets were in fixed-income securities such as stable value investments, bond funds, money funds and the fixed-income portion of balanced funds.

The report also found that 401(k) participants’ investment in company stock continued at historically low levels at the end of 2019, with just five percent of 401(k) assets invested in company stock, in line with recent years.

Target-date funds were available in 87% of the 401(k) plans in the 2019 database. These plans offered target-date funds to 87% of the participants in the database. Sixty percent of all 401(k) plan participants in the database held TDFs, while 69% of participants offered them held the funds. TDF assets totaled 31% of all 401(k) plan assets and 35% of the assets of plans offering TDFs.

As in prior years, the 2019 data shows that participants’ asset allocation varied with age. Younger participants favored equity funds and balanced funds, while older participants were more likely to invest in fixed-income securities such as bond funds, money funds or GICs and other stable value funds.

The study also found that age and tenure with an employer continues to have significant impact on 401(k) account balances. At year-end 2019, participants in their forties with more than five years of tenure had an average 401(k) plan account balance of about $43,000, compared with an average 401(k) plan account balance of more than $330,000 among participants in their sixties with more than 30 years of tenure.

The research also found that a minority of 401(k) participants had loans outstanding. At year-end 2019, 18% of all 401(k) participants eligible for loans had loans outstanding against their 401(k) plan accounts, down slightly from year-end 2018. The size of outstanding loans relative to the size of a participant’s account was also smaller year-over-year, amounting to 8% of the remaining account balance, on average, at year-end 2019, down 2 percentage points from year-end 2018, and well below the historical average. Loan amounts, on average, also decreased in 2019.

The 2019 EBRI/ICI 401(k) database contains information on 73,312 401(k) plans with $0.9 trillion in assets and 11.1 million participants. The database includes 401(k) participants across a wide range of age and tenure groups. For year-end 2019, 48% of participants were in their thirties or forties, while 14% of participants were in their twenties, 25% were in their fifties and 13 % were in their sixties.  

In this dataset, the average account balance was $81,201 and the median account balance was $17,760.

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