In the 21st-century workplace, creative and non-traditional employee benefits have become something of a cottage industry. From employee wellness programs to paternity leave policies to gourmet lunch options and even in-office manicures, there is seemingly no limit to the types of perks that employers will provide in order to keep their employees happy. Every company, it seems, is angling to become the next Google, with engaged and invigorated workers providing innovative solutions to business problems.
And in general, these programs are both sensible and well-intentioned from the perspective of the employer. Countless studies have shown that happy employees are more productive, more successful, and less likely to leave for other job opportunities. In addition to helping to attract high-caliber talent, keeping existing employees happy can save an employer both time and money in the form of lower re-training costs. This dynamic leads many firms to view these sorts of investments as necessary expenses in order to keep employee turnover low.
Unfortunately, many employers are often simultaneously underutilizing one of the most fundamental employee benefits of all, the company retirement plan. After all, financial discomfort (or uncertainty) is almost always listed among the top three most common sources of stress; for men in particular, it is often the number one source.
And while retirement benefits have been found to be the second-most expensive employee benefit to provide (behind health insurance, but ahead of paid vacation days), they often don’t get the attention or thought that they might deserve. According to an AllianceBernstein study of defined contribution plans first conducted in 2005, 68% of plan sponsors spent a day or less each year thinking about plan design–and a full half of those allotted five hours or fewer. That sort of apathy unfortunately flows through to participant education as well, as only about a quarter of plan participants reported that they had received any investment advice through their plan in the prior year.
Employers are in a unique position to contribute to the long-term financial well-being of their employees, and it doesn’t ultimately take much to help. We’ve provided a series of basic steps that employers can take to maximize the impact of one of their most expensive (and important) employee benefits.
Step 1: Define the Benefit
As has been well documented, there has been a dramatic shift in recent decades away from traditional defined-benefit (pension) plans toward defined-contribution (401-k) plans. Whereas in 1989 there was a nearly even split between pensions and 401(k)s, with pensions leading, there are now approximately five times as many employers who offer only 401(k)s as there are those who offer only pensions. Clearly, the primary effect of this change is to place more of the responsibility of retirement planning on the shoulders of the employee, rather than the employer. Unfortunately, most employees still haven’t totally caught up to the implications of that change.
Most specifically, it seems that many employees simply don’t understand the true benefit of having a 401(k). While employer match programs are typically the most generous portion of any defined contribution plan, simply having a 401(k) plan available at work places those workers at a distinct retirement advantage compared to those who do not. The benefit of tax-deferral on retirement savings is palpable, capable of producing more than double the investment return over a working life than a comparably invested taxable brokerage account. But because the benefit is difficult to see in the immediate term (on a one-year sample, it doesn’t amount to much; its true benefit stems from a compounding effect over long time periods), most employees don’t ascribe it much value.
That’s a missed opportunity for employers, who seemingly haven’t done a very good job of communicating the benefit to their employees. It’s important to note that the 401(k) provides employees with a much more powerful vehicle than would otherwise be available to them–recall that contributions to 401(k) plans are capped at $18,000 annually, while non-covered workers could only contribute $5,500 to their IRAs in the absence of the employer benefit. This means that employees who have a 401(k) have more than triple the ability to save for retirement of their non-401(k) counterparts, even before accounting for the impact of any employer match. If the employer isn’t communicating this fact to its employees, then the massive potential power of this benefit may be lost.
Step 2: Empower, Don’t Intimidate
For many employees, without proper education, the responsibility of saving for retirement is felt more as a burden than as an opportunity. That’s too bad, because in general, the shift toward employee-driven retirement savings should be considered a net positive for employees. Having control over one’s retirement funds (which was not possible in ye olde company pension days) allows an employee to customize an investment approach to suit his or her goals and risk tolerances, to better integrate that investment approach with a comprehensive personal financial plan, and also to time contributions when one’s cash flow (and lifestyle) allows, as opposed to simply automatically deducting from an employee’s salary on a flat schedule every year.
Simply put, defined contribution plans are more nimble, more flexible, and more transparent than any pension plan ever was or could have been. While traditional pension plans had no choice but to (attempt to) be all things to all people, defined-contribution plans are infinitely modular and customizable. The shift away from pensions and toward 401(k) plans is, at its core, an incredibly empowering development for workers. So why are so many employees so reluctant to embrace them?
The answer, primarily, comes back to confidence. In the AllianceBernstein 401(k) plan study, when it came to rating their investing abilities, 61% of plan participants classified themselves as either “unprepared” or “reluctant” investors, indicating that absent their employer-based retirement plans, they would have been as likely to have stuffed their savings under their mattress as into an investment account.
For these employees (remember, they’re the majority), power can be paralyzing, not liberating–in fact, somewhat ironically, the more options an employee was given, the more likely he was to become intimidated and to withdraw from the situation entirely. According to a 2003 Columbia University study of Vanguard 401(k) plans, for every 10 investment options (funds) that were added to a retirement plan, employee participation typically dropped by as much as 2 percent. A summary chart of the researchers’ findings is reproduced below.
Providing the “Cadillac” of retirement plans is meaningless if a firm’s employees don’t know how to drive it. For the majority of plan sponsors (and participants), the simpler, the better.
Step 3: Simplify and Educate
Ultimately, while employees might in fact appreciate the flexibility and control that they are given, more often than not, it can simply add to their feelings of stress with respect to financial matters. Most employees are not financial experts, and do not come pre-equipped with the kind of knowledge that is necessary to properly plan for their retirement years–a response of “just do it for me” is surprisingly common among defined-contribution plan participants. Generally, unless they are fortunate enough to be working with a competent financial advisor, participants may end up relying on their employer to give them the guidance that they need.
Indeed, for those plan participants in the AllianceBernstein study whose employers did offer financial advice along with their 401(k) plan, more than 70% reported having implemented at least some of the recommendations they received (and nearly 20% of those implemented all of the recommendations that were made). It seems clear, then, that an optimal retirement plan provides both an adequate number of investment options and a professional advisor who can help navigate the differences between and among the various options. For those plan sponsors whose 401(k) plan custodians are unwilling to provide participant education, it might be reasonable to consider switching custodians, or at least to bring in an independent advisor to take over the role of employee education.
Basically, defined contribution plans have primarily suffered from a marketing problem, not a design problem. While they are certainly capable of producing a much greater benefit to employees than the pension plans they replaced, most employers have not designed their defined-contribution plans properly–or given plan participants the proper tools–to fully realize the potential rewards.
Enlightened plan sponsors must recognize that they are uniquely positioned to help assuage any financial concerns that their employees may have. By offering a 401(k) plan to employees, an employer is making a strong statement–”I want to be, and will be, the cornerstone of your retirement planning”. But this choice comes along with a responsibility. Simply by virtue of being covered by an employer-based retirement plan, employees may be prevented from contributing to an IRA (or at least from enjoying a tax deduction from such a contribution). This means that the 401(k) may effectively be an employee’s only option for retirement savings, which therefore makes that employee particularly reliant on the design of the plan, and their understanding thereof.
It simply isn’t reasonable to expect every employee to know everything about his or her retirement plan, just because a Summary Plan Description was handed to them when they showed up to work on the first day. Ensuring an employee’s financial well-being is an ongoing commitment for an employer, and one that has extraordinary power to create a happy, healthy, productive group of workers. Retirement plans aren’t just a set-it-and-forget it type of employee benefit, unless they are incredibly well-designed (which most, unfortunately, are not). But it’s never too late to turn things around; your employees may be counting on it.