The following guest post is submitted by our board member, former SHRM CEO Sue Meisinger. Most of us want to retire some day, and hope to do so with enough income to live comfortably. The information in the chart at the end of this post is from Gallup’s annual Economy and Personal Finance survey. Note that retirement savings accounts rank 3rd behind social security and pensions as a major source of income for current retirees. As fewer and fewer retirees have pensions and entitlement programs like social security continue to be political footballs, those employee savings plans are going to become an increasingly important driver of well being in retirement.
Read on for Sue’s take on the role employers should play in helping their workers to plan for retirement.
Years ago a young relative came to me, having a meltdown because she hadn’t found a job after looking for a whole three weeks. I tried to calm her down, pointing out she’d just returned to the country after finishing her Masters at Oxford, but admit I burst out laughing when she cried out “and I haven’t even started to save for retirement!” She was 23.
While I laughed, I was also proud. She was smart enough to understand the power of compounding. She knew that starting early to save for retirement would make a big difference over time.
There’s lots of data suggesting that most employees aren’t going to be as prepared. According to research from the Employee Benefit Research Institute, while more than half of workers expressed some level of confidence that they would have enough money in retirement (13 percent are very confident and 38 percent are somewhat confident), 28 percent are not at all confident and 21 percent are not too confident.
More and more employers are offering defined contribution plans, such as 401(k)s, where employees are responsible for making contributions and managing their own retirement fund. But employers also have a responsibility to help employees prepare for retirement.
The FINRA (Financial Industry Regulatory Authority) Foundation has outlined the 10 best practices for employers to help build long term financial security for employees.
I think the most important practice is to provide new employees with basic retirement plan information and to ensure that they understand the information provided. Employees are much more likely to participate in a plan and make informed decisions when they actually understand how the plan works and what decisions the employee needs to make and why. Don’t assume that, if an employee has contributed to a 401(k) plan in the past, they understand what that means.
The second most important practice, and one made much easier with today’s payroll technology and changes to pension law, is to use automatic enrollment to boost participation in an employer’s retirement plan. As noted in the FINRA Foundation publication, automatically enrolling new hires in retirement savings plans “has been shown to substantially increase participation in and contributions to 401(k) and other types of defined contribution plans.”
In a dynamic economy, with great job mobility, defined contribution plans provide employees with an important, portable, tool to save for retirement. But employers need to do their part to help educate employees how to make best use of this tool.