I recently spoke to an employee who had decided, at age 54, that it was time to start focusing on retirement.
Her goal was to retire at age 65, and she was wondering if that would be possible, considering she had not been saving for retirement for the past several years. She’d been in a financial fog during that time while trying to recover both emotionally and financially from a rough divorce.
As I began to ask her what she had available in terms of an employer-sponsored retirement plan, I learned she was eligible for a pension, but she had no idea how much she might receive at age 65. She knew her company offered a 401(k), but also had no idea about the plan.
As I peppered her with questions like “Is there a 401(k) match?” and “What’s your pension formula?” her answer every time was “I don’t know.” She was upset that she couldn’t answer my questions and concerned that she might never be able to retire.
Helping employees focus on retirement
I walked her through an online pension estimate and she was pleasantly surprised to see that her pension will replace 25 percent of her final income at age 65. After adding in Social Security, she will be able to replace about half of her income.
She was so relieved to hear she had at least that much of a cushion, and she committed to saving the equivalent of her alimony payments (30 percent of her income) towards her 401(k) that she plans to enroll in immediately. She’d been unable emotionally to even think about saving for her own retirement until her daughter graduated from college this month, since she had been using the alimony to pay for tuition and she was determined that her daughter would come out of college without any debt.
So what could have helped this employee? Auto enrollment in the 401(k) when she was hired would have been a good start. Instead, she’s lost four years worth of tax benefits, the match, and growth opportunity.
Education on the pension formula and payout options would have also been beneficial as would have some general financial education on prioritizing goals. These are some of the key guidelines that are also suggested in a recent white paper published by the U.S. Chamber of Commerce, entitled Private Retirement Benefits in the 21st Century: A Path Forward.
The Employee Benefits Committee of the U.S. Chamber of Commerce provides a long-term view of retirement changes that are needed to bolster the voluntary employment-based retirement benefits system and enhance retirement security for workers.
What’s interesting to note is that even though conventional wisdom suggests that today’s retirees receive less income from employment-based plans than in the “good old days,” the Chamber of Commerce’s report found that the number of retirees receiving retirement income from employment-based plans has actually grown from 20 percent of retirees in 1975 to 31 percent in 2009, and income from defined benefit and defined contribution plans represented 19 percent of retiree income in 1975; whereas, by 2009, it accounted for 26 percent of retiree income.
Tips that might help prepare
Here are some tips offered by the Committee:
- Encourage the use of automatic plan features. While we see many employers beginning to offer auto enrollment and even auto escalation, participants are currently offered an “opt-out.” Instead, offer an “opt-down” or “opt-up” too so employees can recognize that the auto feature is not an all or nothing decision.
- Encourage financial education for retirement and tailor the education to the demographics of the workforce, and provide the education to workers early in their career to give them more opportunity to properly prepare.
- Help preserve retirement assets by permitting workers to continue to contribute to the plan even after a hardship withdrawal, and extend the rollover period or repayment terms on plan loans for employees who terminate employment.
The Chamber of Commerce also suggests some policy strategies to make retirement assets last, including encouraging additional distribution options and re-evaluating the required minimum distribution requirements. ‘
One of the great successes of the private retirement system has been the ability of employers to implement new plan designs to accommodate changing demographics and evolving workforce needs. It will be interesting to see what new policies will emerge, and according to the Chamber, it is more important than ever to ensure that there are no statutory, practical, or political barriers to innovation that would discourage participation in the private retirement system.
This was originally published on the Financial Finesse blog for Workplace Financial Planning and Education.
