As an employer, you’ve worked hard to put together an attractive benefits package – vacation, insurance, retirement benefits, and maybe even some unusual perks. But many benefits go unutilized or underutilized, and retirement benefits requiring employee involvement are no exception. As defined benefit plans – pension plans that provide a set amount of income in retirement – are on life support due to economic factors, most private employers have turned to defined contribution plans (such as 401(k) plans) as an alternative, and many public employers are following suit. A defined contribution plan is one in which a certain amount or percentage of money is set aside each year by an employer for the benefit of the employee, but how much the employee gets in retirement is determined by market forces. For employees to have a secure retirement on a defined contribution plan, they need to decide early that they will participate, save early, and invest wisely. Employers can – and often should – encourage employees to make the most of this benefit so employees and their families are more likely to have their money last in retirement.
Retirement planning should be a matter of attention for employees at any age. Millennials are entering the workforce in larger numbers, often saddled with crippling student loan debt and struggling to live independently and start families. These employees may feel they have the least opportunity and incentive to save – their earnings are at the low end of the spectrum due to inexperience and retirement is decades off. But employers can talk to millennials about the importance of developing a habit for saving and the exponential benefits of compound interest. Mid-career employees have higher incomes, but may be paying off mortgages and putting children through college. Employers can encourage these employees to consult with a financial planner (sometimes available as part of the 401(k) plan) to discuss balancing these demands and adjusting their investment portfolios to take on the right amount of risk for their life situations. As employees near the end of their careers, employers may want to remind them that federal law allows those age 50 and over to make “catch-up contributions” to ramp up their savings. Employers should steer clear of exerting pressure on employees or offering specific investment advice.
Having the retirement conversation can be beneficial for employees and employers alike. Employers have the opportunity to show their employees that they care about their long-term financial wellbeing and that they are engaged in helping them succeed. Financial pressures are a major source of stress for employees, so helping them succeed in this area may lead to a healthier and more productive workforce. If you match employee contributions or offer profit-sharing contributions, make sure to remind employees of this valuable benefit. A word of caution to those with employees earning around minimum wage or engaged in wage disputes – employees may not take kindly to such shows of concern if they feel they are underpaid or are not paid enough to afford today, much less the future. Employers should also take care to avoid coming across as paternalistic. Finally, employers should avoid stereotyping or making assumptions when speaking with employees. For example, it would be unwise to assume that an older employee with no children has no financial demands and is therefore prepared for retirement.
What if you do not currently offer a retirement plan and cannot or choose not to do so? Employees can still contribute to individual retirement accounts (IRAs) provided they meet federal eligibility requirements. In addition, a new federal retirement account called the myRA is available to those without access to a retirement plan at work and can be funded through payroll deductions. The myRA has no fees, is easy to understand, and carries no risk of loss. A limitation to the myRA is that while it functions well as a starter account, it is unlikely to be enough for employees to retire in comfort as there are no participant options for investments and the elimination of risk means these investments are not designed for significant growth. Balance caps provide another limitation, although many employees will become eligible for employer-sponsored plans long before reaching those caps. Therefore, the myRA may be a good option for employees who value security over growth. The myRA is a new option designed to deal with an epidemic of inadequate retirement savings. States are tackling this problem as well. Connecticut is exploring a program to mandate that most employers offer retirement plans, so employers should stay tuned for new developments.
Employers can help employees become aware of their options when it comes to retirement to help solve this national crisis while boosting employee relations at the same time. This is an opportunity that should not go to waste.
Rebecca Goldberg, an Associate at Berchem, Moses & Devlin, P.C., is a labor and employment attorney advising employers on all aspects of the employment relationship. She regularly advises small to large businesses with everyday human resources questions and concerns, providing clients with cost-effective ways to avoid litigation exposure. She can be reached at 203-882-4105 or [email protected]