Extending Financial Wellness Into Retirement

How can employers ensure financial wellness programs create habits that carry into retirement and address employee concerns about the future?

U.S. employees’ financial well-being has improved, but many still live paycheck to paycheck, overspend and remain worried over the future state of their finances, according to a survey of 8,000 U.S. employees by Willis Towers Watson.

The Global Benefits Attitudes Survey found 43% of U.S. workers are satisfied with their financial situation, an increase from 35% in 2017. Employee satisfaction with their finances has now recovered to levels seen between 2011 and 2015. Additionally, four in 10 (42%) say their financial situation has improved over the past two years, and nearly six in 10 (58%) believe their finances are heading in the right direction.

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However, the survey also revealed 70% of employees are saving less for retirement than they think they should. Nearly two-thirds (64%) believe their generation is likely to be much worse off in retirement than that of their parents.

Charles Schwab research findings show that these pre-retirees are nearly as anxious about what the future looks like as the present, with 65% feeling overwhelmed by saving enough now for retirement and 52% feeling overwhelmed by how they will ultimately manage their different income sources once they take the leap into retirement.

Many of the things people on the cusp of retirement are concerned about are similar to issues addressed in employer financial wellness programs regarding current finances, including:

  • Managing different income sources and accounts in retirement (52% of pre-retirees are worried);
  • Knowing how to invest (50% find it difficult); and
  • Managing unexpected expenses (59% find it difficult).

Pre-retirees also find managing the tax implications of withdrawing from multiple accounts (54%) and projecting how long their savings will last (57%) difficult.

The question is, how do employers extend the financial wellness theme into retirement? That is, how can financial wellness confidence today translate into confidence about retirement?

Addressing Current Issues

In its report on findings from its Driving Plan Health study, Principal says, “Putting in the time now to support retirement income planning needs may pay off as it’s likely to become even more critical as later generations transition into retirement with diminished expectations of relying on pension or Social Security.”

The study found nearly one-third of pre-retirees are not participating in their 401(k) plans. Of those who do, less than half save 10% of their income, including the employer match. However, Principal finds that to overcome the gap between those workers who want to use their 401(k) plans for retirement and those who really do, there are ways plan sponsors can help pre-retirees. Plan design provides the foundation for improvements, supported by educational materials in the form of participant communications and online tools and resources, it says.

Influential plan design features include automatic enrollment with a re-enrollment feature, default deferral rates of 6% or more, a diversified investment option default such as a target-date fund (TDF) and optimizing the employer match formula to encourage employee contributions of 8% to 10%.

According to the Principal study, employer match remains a significant driver of participation, especially among older workers. Total employer contribution is about 20% more strongly associated with participation rates among pre-retirees than overall participant population.

In addition, digital plan design tools encourage participants to plan and save more. Thirty-five percent of respondents say they interacted with an online calculator to explore the effect of making changes. Of those, 46% changed their deferral rate during that same online session.

Shane Bartling, senior director, retirement, Willis Towers Watson, based in San Francisco, says a struggle with controlling spending is at the heart of current financial wellness efforts crowding out the ability to save for retirement.

He notes that the top tools for financial wellness tend to be for budgeting and modeling for long-term retirement, but the research is showing those tools, while they may help to inform participants, don’t necessarily help to resist urges to spend, especially when people have high amounts of stress and a lack of social connections. “Difficulty in planning and being thoughtful about how to spend and to avoid urges to spend on things that make you feel better is very human,” Bartling says. “Perhaps the biggest mistake made in financial wellness programs is expecting humans to be logical. Especially under stress, we don’t behave in logical ways.”

He adds that the implications for how plan sponsors present their wellness solutions and design retirement plans are significant. “When we looked at the portion of survey respondents that have higher confidence in their finances, across the board they indicated they have more supportive social connections and a broad array of employer resources. The takeaway for employers is employees can’t hear supportive messages from too many people or in too many different ways,” Bartling says.

He adds that another key implication would be that financial wellness programs should at some point shift focus away from traditional budgeting and education techniques to much more powerful in-the-moment approaches—approaches that are emotionally impactful and easy to understand.

For example, Bartling says employers could send a targeted message about tax refunds—using the money to pay off debt or establish an emergency savings fund rather than upscaling one’s lifestyle—and a tool to help employees do so quickly. “It may be less rewarding in the short term but can vastly improve an employee’s financial situation. And it can make employees feel better about resisting the urge to spend on lifestyle,” he says.

Addressing Future Worries

Good savings and spending habits employees learn during their working careers can be carried over into retirement years.

Nathan Voris, managing director of strategy at Schwab Retirement Plan Services in Richfield, Ohio, notes that the retirement plan industry has made big strides in financial well-being, but, by and large, education and programs are still focused on debt, budgeting and emergency savings so people can become a retirement saver. “Financial wellness is still so much accumulation-driven. But let’s assume we’ve done that well. What happens at age 60 when people start to think about how to replace that paycheck they’ve been getting for 40 years?” he queries. “We’ll still haven’t cracked the nut on extending the financial wellness theme into decumulation.”

Voris says Schwab’s view is that it’s a very personalized and customized process. He says the majority of employees today are going to see from calculators that they are vastly underprepared for retirement and need to save more, make compromises and plan for how to live on potentially less. Voris says it often takes the guidance of another human to help employees with a customized plan and give them confidence in their financial future. This should be blended with scalable, low-cost tools to meet pre-retiree challenges.

An example of a tool to help pre-retirees is Schwab’s in-plan third-party advice and managed account engine. At the age of 55, the user experience starts to pivot toward decumulation rather than accumulation. The tool gives sustainable spending suggestions across an individual’s “buckets” of potential income—Social Security, in-plan savings, out-of-plan savings—and provides an individual with a guide for how to withdraw from a combination of taxable, tax-deferred and Roth-enrolled accounts in a tax-smart and efficient way.

“Employers also need to connect pre-retirees to the right person as a resource—an adviser or expert in guaranteed income, for example,” Voris says.

And the Schwab study found particular education is needed for pre-retirees. Some plan sponsors have reported they offer special events or resources for people nearing retirement, and Voris says Schwab’s own sessions for pre-retirees are very well-attended.

According to the Schwab study, 70% of pre-retirees know nothing/not a lot about required minimum distributions (RMDs), and the same percentage know nothing/not a lot about the tax implications of retirement account withdrawals. Nearly half (48%) are worried about paying too much for advice on managing retirement income. “The key is teaching them to translate education into action,” Voris says.

As for pre-retirees’ concerns about managing unexpected expenses, Voris says that tenant of financial wellness applies throughout life. The idea is a retiree will have “buckets” of retirement savings and one will only be touched in an emergency.

He says people who have developed the habit of saving and investing in life will likely continue that into retirement. “We’ve seen plenty of folks who have more money at age 80 than at age 60,” he notes.

Managing money in retirement is a complex topic and in-plan solutions are definitely growing, but Voris says there is a need to use outside solutions.

Reasons to Communicate Regularly With Employees About Retirement

Megan Yost, with Segal Benz, discusses how keeping employees engaged with their retirement benefits helps them get the most out of benefits and feel more financially secure.

A lot has been written about employees’ financial stress and how it affects their productivity and your organization’s profitability. Fortunately, when it comes to retirement planning, many plan sponsors have made saving for retirement easier than ever before. Features such as auto-enrollment and auto-escalation help people save money and increase their savings over time. Even target-date funds offer auto-investing to help people’s money stay diversified.

But will a set-it-and-forget-it approach really help your employees feel more confident about their financial well-being? Probably not. Communicating with your employees year-round, however, will help them get the most from your plan. Here are five reasons why.

1. Reiterating the value of your retirement benefits will help people appreciate them.

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The more you communicate with your employees about their financial benefits, including retirement, the more likely they’ll be aware of what their benefits actually are. All too often, plan sponsors work hard to design and review their retirement plans, investments and other planning tools, but information about the features of the plan are buried in hard-to-read plan documents. If you want people to appreciate the benefits available to them, you have to remind them what those benefits actually are—and why you even offer them in the first place.

2. Your employees’ lives are constantly changing.

People need to know where to find information about their benefits—optimally, your benefits website. But first you need to get them in the habit of going there. And you do this through push communications—messages you send out, such as emails, home mailers and social media posts, among others. Through push communications, you build awareness of how and where to find information when it’s needed. This is crucial for employee benefits. Needs can change quickly. When they do change, you want employees to be in the habit of going to your benefits website for the information they need. This will help them feel empowered and supported, and they’ll appreciate your benefits more as a result.

3. Repetition builds financial acumen.

Retirement planning is complicated. It requires us to think about topics we’d often prefer to avoid, including aging, money and death. That’s precisely why it’s important to start engaging with employees on retirement planning early on—and to do so often. Ask employees to do just one thing at a time—such as reviewing how much they’re saving or how they’re invested. Align these communications with events in their lives or times of year when finances are top-of-mind, such as when your organization offers annual pay increases or when annual contribution limits are increased. Not only can this help ingrain healthy habits, but it can also help your employees build their financial capability.

4. People are super busy and super distracted.

It’s no secret that we’re oversaturated with information and pressed for time. So how do you compete for your employees’ attention? Take a page from consumer marketing and apply the rule of seven. This concept refers to the number of times someone needs to receive a message before they decide to make a purchase. And while you aren’t necessarily trying to get employees to buy something, you’re often trying to get them to take action. But you’re competing with technology, which allows marketers to send repeated, sophisticated and targeted communications in just one day alone. So it now takes even more efforts to get your message to resonate with employees.

5. Reminding employees why they’re saving may help prevent them from cashing out their accounts or withdrawing too early.

Enrollment and investing can require little input from employees if they’ve been auto-enrolled into your plan’s default fund. You need to make sure they understand what you’re trying to help them accomplish—creating a source of income for when they eventually stop working. One of the new requirements within the SECURE [Setting Every Community Up for Retirement Enhancement] Act—including lifetime income estimates in annual statements—should help with this. But you’ll want to connect people’s emotions to the purpose of their retirement account, so it doesn’t become a source of ready money when they need cash. You’ll also want to remind your employees of the broad array of benefits you offer to help them manage their financial well-being—from discounts to health savings accounts to subsidized child care and more. Helping employees save in other areas could free up some much-needed cash and prevent them from raiding their retirement accounts and missing out on the value of compounding.

Communicating regularly to employees about retirement and other financial benefits has lasting advantages for employees and your organization. It will help ensure employees get the most from the resources you provide and can help them—and their families—value what you offer, while simultaneously reducing their financial stress and helping them—and your organization—thrive.

 

Megan Yost is a vice president and engagement strategist at Segal Benz, a provider of human resources and employee benefits communications. Contact her at myost@segalbenz.com.

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates.

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