To Prioritize Retirement Saving May Not Be Best for All Workers

If you’re encouraging all of your employees to put as much as they can into their defined contribution (DC) plan, I hate to break it to you, but you may be causing more harm than good.

The fact is, the DC option might not be the best place for many of your employees to put their discretionary income, especially if they don’t have an emergency fund or they’re up to their eyeballs in high-interest debt.

For exactly that reason, it’s important to make sure you go beyond encouraging higher and higher DC plan contributions—which only some employees can manage—and, instead, meet your entire work force where it is, with more empathetic, targeted and holistic financial guidance.

So What Does This Look Like?

In an ideal world, you’d be able to pair up each one of your employees with a savvy and charming financial guru who could look at their unique financial situation and give tailored recommendations on how they should spend their free dollars—i.e., money left over after basic living expenses are covered. But there’s a good chance you don’t have a budget for that.

The good news? For exactly zero money, you can make your DC plan’s messaging way more useful by highlighting some typical, less-than-perfect financial situations and giving advice accordingly. As a result, your employees can latch onto the situation closest to their own and feel more confident in their choices.

Here’s what this kind of targeted advice might look like, say, in an email you send to your work force:

Putting money away for your retirement is important, but how important depends on the financial boat you’re in right now. Here are three common employee scenarios—and some financial food for thought, for each.

Example 1) Joan, the prepared

Joan has a few thousand dollars saved for emergencies and no high-interest credit card debt. So, for Joan, it makes sense to fund her DC plan up to the company match and beyond—as much as she can afford.

Why? Her short-term financial situation is secure, so she’s in a position to focus on her long-term goals. For context, the average 401(k) contribution rate at Vanguard in 2016 was 6.2% of total salary; at Fidelity, the average was 8.4%. However, most advisers suggest putting away 15% of your paycheck if you can.

Example 2) Dave, who has no emergency fund

Dave lives paycheck to paycheck and doesn’t yet have an emergency fund. For Dave, it would make more sense to set money aside for unexpected emergencies before he starts focusing on his DC plan, even if his company offers a match.

Why? If Dave finds himself suddenly with an unexpected expense—e.g., having a broken transmission or a flooded basement—and doesn’t have cash saved up, his options for paying off this bill are to: a) raid his existing DC plan account and pay a penalty; b) take out a loan against his account, reducing his after-tax earnings by paying back principle and interest; or c) use a high-interest credit card. Each of these options would cause him to lose money beyond the cost of the surprise expense. Not great for Dave!

Example 3) Greg, who’s got a safety net, but who’s saddled with lots of high-interest debt

As Greg has an emergency fund, it makes sense for him to contribute to his DC plan until he reaches the employer match—he just can’t beat a 100% return on his money. However, as he has high-interest credit card debt, he probably should contribute no more than to the match until his debt is repaid.

Why? He would lose more money than he’d gain if still carrying that debt. Specifically, his 401(k)-related gains—7% through 9% annually, on average—would most likely be less than the losses he would take on his credit card—let’s say, 13% through 17%.

After You’ve Educated Your Employees, Make It Easy for Them to Act

You could add the examples above to your general DC plan messaging and call it a day. But why stop there? If you’re truly invested in helping your employees not only plan for retirement, but also create savings and dig out of debt, take these three steps to boost their chances of actually getting there:

Reiterate your 401(k) messaging whenever employees get a raise, bonus or promotion. There’s no better time to discuss what workers should do with their “free dollars” than when they have just landed more, courtesy of payroll.

Share links to reputable personal finance blogs and podcasts. Remind your employees about these resources regularly by highlighting one each month. The more visibility you give such tools, the more likely your employees will try them.

Highlight apps that put saving on autopilot. In the same way DC plans use automated deposits to make retirement saving easy for employees, mobile apps use automation to help people build an emergency savings fund, pay down credit card debt, and invest in smart, manageable and automatic ways.

Making your employees aware of these tools doesn’t guarantee they’ll use them, of course. But it will show that you have their best interests in mind—which, when it comes to creating change, is half the battle.

Bob Armour, chief marketing officer (CMO) of Jellyvision, makers of ALEX, an interactive communication software used by more than 8 million employees to make better decisions about their health care benefit options, DC plan allocations and financial wellness.