Whether your employees are new to the workforce or they are 20 years into their career, it's never too late to start planning for the future and retirement plans are a great place to start. There is no such thing as too much retirement planning. Out of the 70% of civilian workers and 94% of union workers who had access to retirement, only 45% of Americans saved nothing for retirement, including 40% of Baby Boomers. This means planning for retirement is something more underutilized than a company may think.
Discussing the retirement plan during onboarding is not enough. Not all employees have enough financial education to confidently kickoff this account. While it may feel out of the realm of company responsibilities to help employees with their life after work, the benefits to both the organization and employee can’t be overlooked. Showing interest in how your employees are using or not using the fund is a way to set yourself apart in a competitive recruiting landscape. Employees want to see companies give a more holistic approach to workforce support. A healthy employee isn’t just engaged at work, but also secure and independent outside of the office. High participation in a retirement plan can lead to improved retention, increased loyalty and employee buy-in. As participation increases, plan fees diminish freeing up cash to reinvest in the company.
All this in mind, how exactly can an organization encourage and increase participation?
A good rule of thumb is to have 10 times your final salary in savings if you want to retire by age 67. Walking through the retirement planning landscape with your employees is the first step in plan participation. Even if only 1% of income is set aside, contributing at all is a move in the right direction.
It shows foresight and self-discipline on the way to overall financial health. Explain this to your employees! Show them the powers of compound interest, how much they may need upon retirement and the current state of Social Security.
One of the most misunderstood concepts of a retirement plan is the tax structure. An IRA is not simply a savings account. The tax structure alone sets these plans apart from bank accounts. Money designated for the plan comes out as pre-tax income. Meaning a set percentage of your paycheck before tax can be set aside in the plan. This shelters your money from the federal and state taxes applied to the rest of your paycheck (for now). Three common types of plans include 401(k), 403(b) and Simple IRA.
401(k): With a Traditional version of the 401(k), your money is contributed before taxes, meaning that you receive a tax deduction that lowers your income, or in other words, you have a lower tax liability now. However, in the future, when you withdraw your money from your account, you have to pay income taxes on the amount you withdraw.
403(b): The 403(b) is set up similarly to a 401(k) but offered to state employees and non-profit employees.
SIMPLE IRA: A Simple IRA is an employer-sponsored retirement plan offered within small businesses that have 100 or fewer employees. Contributions to the plan are made pre-tax, and the money in the plan accumulates tax-deferred until the money is withdrawn at retirement.
These accounts when invested will benefit from compound interest. So…what exactly is compound interest, you ask?
“ Compound interest is interest paid on the initial principal as well as the accumulated interest on money you have borrowed or invested. Compound interest is like double chocolate topping for your savings. You earn interest on the money you deposit, and on the interest you have already earned?—?so you earn interest on interest.”
A survey from Alight Solutions found that 68% of large U.S. employers now auto-enroll their employees. One of the most effective ways to increase employee participation is to automatically enroll new employees. Requiring them to opt-out instead of opt-in makes it easy. Studies show that many employees choose not to enroll because they are confused by the process.
“ Automatic features harness the power of inertia by taking the workers who may not take action and making sure that they begin to save today for retirement. This helps increase the chance that more people will be on a favorable path to a more secure financial future.”
–Rob Austin, director of Research at Alight.
Auto-enrollment should be a well-known fact to your employee right away. Finding out a certain percentage of money that was held back from an employee’s paycheck without them realizing can cause distrust and anger. Clearly explain what is happening from day one so employees know they the choice to continue or easily opt-out.
Employees choose to set aside a chosen percentage to invest into their retirement plan. Employers can choose to match up to a certain percentage to enter the account. (Employers do not have to offer this benefit when setting up plans.) Companies that offer matches have the chance to provide free money to employees receiving a tax break in return. A match can inspire employees to contribute in order to receive the full match. An employer match is a powerful benefit that can accelerate savings. In return, watch employees loyalty and engagement rise.
A progressive way to increase employee contributions is to automatically increase the contribution. This feature one, along with auto-enrollment must be clearly communicated to your employees. Auto-escalation increases a participant’s deferred rate of 1% every year until they reach a predetermined cap (usually 10%). Just as salary is re-evaluated every year, retirement plans should be as well. If an employee is earning more money, she should think about increasing her contribution, however, this step is often overlooked. Automatically increasing contributions does this for you without having to think about it.
“You must gain control over your money or the lack of it will forever control you.”
Provide education regularly to your employees. There is always more that can be done to increase preparedness. Emergency funds, separate investment accounts, Roth IRAs, the list goes on. Whether it’s offering a seminar on personal finance, establishing a financial wellness program or starting a small library of books and resources, keeping employees apprised of their money can be a life-changing benefit. Even if your employee chooses not to participate in the retirement plan from day 1, over time using the financial education provided he is now confident to sign up in year 2.
The average American retires at age 63. It’s never too early to start thinking about greener pastures. Any financial advisor will tell you starting young is one of the most powerful tools in investing. You’ve done the first step in offering a plan to your team. Now, using these five steps, employee participation in your retirement plan will increase setting up your company and the employee up for success long-term.
This article originally published on the Red Branch Media blog by Kerry Pivovar.
Maren Hogan is a seasoned marketer, writer and business builder in the HR and Recruiting industry. Founder and CEO of Red Branch Media, an agency offering marketing strategy and outsourcing and thought leadership to HR and Recruiting Technology and Services organizations internationally, You can read more of her work on Forbes, Business Insider, Entrepreneur, and The Red Branch Media Blog.
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