Extending Financial Wellness Into Retirement

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.

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.