…So this evening I came across a white paper from Aon Hewitt here that shows only 1/5th of the workforce is putting away enough earnings to retire when their parents did. The article goes on to highlight that employers are putting in place increasingly generous 401(k) matches *and* auto-enrolling employees into their plans to rectify the issue… but most workers are still a long ways away from where they need to be in order to obtain financial security. And with the average employee needing an average of 11 times their final pay to retire with dignity at 65, many workers are going to need to take a more hands-on approach to saving for their future.
To this end, I said in my last post that I think a big part of helping employees make the decisions they need to in order to grow here will come in the form of employers helping them visualize the consequences of not saving, and the data supports that. According to a Prudential survey that analyzed women’s financial experiences and behaviors:
…the results indicate that women are more confident in their ability to manage day-to-day finances. And they have advice for financial services firms about how to help them achieve their long-term financial goals: simplify the process, stop using so much jargon, look out for the customer’s interests, and maintain a strong code of ethics.
^But I also don’t want to dismiss the role of the employer here, and believe they may have an even bigger role to play going forward. In fact, going forward I think that a big part of the solution is redefining the total rewards picture in organizations to place a greater emphasis on retirement savings as a core component of compensation. Don’t get me wrong: When I say this I’m *not* suggesting that employers go back to investing in DB pension schemes. With flat rate and variable rate premiums continuing to go up for single employer plans through law changes such as the Bipartisan Budget Act of 2015, that ship has long sailed. PBGC premium aside, running large DB pension plans simply has too unpredictable an effect on company financial statements (and the liabilities too great with mortality increasing) for employers not move away from them.
That said, companies are doing all sorts of creative things via 401K/DC plans to position their employees to be in good financial shape at retirement. Companies like ConocoPhillips have matches as high as 9% of pay, while companies like Philip Morris contribute in excess of 15% of pay to employee 401K accounts (see the full list from Bloomberg here for a clearer picture of the most generous 401k plans). To be sure, these are very profitable companies that can afford to make these sorts of plan contributions… but I would also submit that at least some of these monies might otherwise make their way into employee pockets in the form of base salary if not for these companies setting those dollars aside for retirement contributions. With this in mind, is part of the solution here to have a total rewards design that funnels more of the dollars normally allocated for pay increases into more generous match components in DC plans? There is an argument to be made that this is perhaps overly paternalistic, but I would say to this that so to is auto-enrolling employees into DC plans at X% of pay, and so to is forcing employees to diversify retirement holdings in company plans, which after the Supreme Court’s decision in Dudenhoeffer I suspect more employers are going to start doing.
…Obviously, the decision to allocate more salary increase dollars towards DC plans in the form of employer contributions is one that should be made carefully (contingent on a host of factors including 1. how it impacts an employer’s pay competitiveness in the marketplace relative to peers, and 2. the demographic breakdowns and current savings patterns of the workforce). But I *do* think the shift might be right for some employers.
Just a Wednesday evening thought stream…
Please share your thoughts in the comments section below.