What if you had a tool to review data that told you how well your employees were preparing for retirement and how well your company’s retirement plan was performing overall? Think how much peace of mind you’d feel knowing your financial wellness program was working, and that your workers were making measurable progress with their money. Likewise, wouldn’t you want to know if your retirement program was falling short?
The good news is, the tool to measure your company’s retirement health already exists. To help you understand how it works, and to discover whether you might need a new approach to financial wellness in your company, let’s take a look at the five metrics we believe go into a healthy retirement plan for an organization.
Savings rate in a 401(k) is the most essential factor in any worker’s retirement readiness. In fact, actuaries agree the amount your employees are saving far outweighs any other consideration, from asset quality to actuarial assessment. (1) For that reason, you will want to see this number averaging as high as possible in your program.
If you want to lift how much employees are putting into retirement accounts, it’s a good idea to help them get a basic understanding of budgeting and saving on a regular basis. Broke people are extremely unlikely to invest, and a 2017 report from Career Builder showed 78% of full-time workers live paycheck to paycheck. (2)
Just as nothing is a surer formula for retirement success than savings rate, nothing is worse for those prospects than debt. And employee loans against their 401(k)s are especially hard on any company’s retirement health. The National Bureau of Economic Research reports 21% of American workers have borrowed against their accounts, and the average balance on such loans has risen continuously for over a decade. (3)
The solution for high 401(k) loans at your company is behavioral. Debt is practically a way of life in America. In fact, the earlier mentioned Career Builder study reveals:
- 71% of all U.S. workers are now in debt.
- That number continues to rise annually.
- Nearly three in five workers (56%) told surveyors they are “in over their heads” with debt.
And just as workers without budgets are unlikely to invest much in your company’s retirement plan, workers who are already saddled with consumer debt probably won’t hesitate to borrow from a nest egg even if they’ve contributed to it heavily in the past. Rather than borrowing more, your employees need motivation to eliminate debt and get aggressive with retirement savings.
Any company would clearly want as many employees as possible participating in a 401(k). The higher this number is, the better the chances your employees have to take maximum advantage of compound interest growth through their careers.
Although a high rating here is great, it’s important to note what drives participation and assess accordingly. Auto-enrollment (AE) in retirement plans has been growing in recent decades. Plans with auto-enrollment are seeing a rise in overall participation, while those without are seeing a decline. Though this is evidence that auto-enrollment is a boon to retirement health, this automatic system falls short of the true behavior change needed to establish lasting financial wellness in your business.
This component of retirement health is related to participant contributions. It varies widely by industry because of two other factors: average tenure and average salary. But that doesn’t mean we have nothing to learn from a company’s average account balance measure.
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The truth is that average balances nationwide are woefully low, with GoBankingRates.com revealing in 2016 that nearly three in five Americans have under $10,000 saved for retirement. (4) The same report had worse news—one third have exactly nothing set aside. That means the majority of Americans have little or nothing saved. And the larger your company is, the more likely you’re employing someone who fits that profile.
Once again, retirement accounts can’t grow unless employees are busy taking the smart steps with their day-to-day finances that must precede secure and long-term investment.
Not every company is in a position to offer its workers an employer match. That’s just the nature of business.
Still, the employer match has historically been the most effective, as well as the most expensive, way to encourage worker participation and savings. If you’re already matching some of your employee contributions, we congratulate you!
But wouldn’t you love to see that precious investment give you a much higher ROI? Of course you would! However, it would be a shame to give so generously to your employees, only to rate poorly in all of the other factors above. That combination of metrics is all too common: an employer is pouring money into a 401(k) match that is then pulled right back out in the form of high loans and withdrawals.
The right financial wellness program can solve this issue and drive ROI too. Unless employees are making the most of your employer contribution, you’re taking a heavy loss from a benefit that’s doing the opposite of your intention. But you’d be amazed how ROI and morale rise when workers get the proper education and guidance on preparing to invest.
How to Help Your Employees Change Their Money Behaviors
As you probably noticed, the most important factor of your company’s retirement health is your team’s behavior around money. It would be naïve to think workers are neglecting retirement planning out of ignorance. Most of them are well aware that they ought to be saving earlier and more aggressively, but most of them are also deeply in debt, living paycheck to paycheck and unable to cover a $1,000 emergency without borrowing even more.
As long as that’s the reality of the average employee, low participation and investment will be the hallmarks of your company’s retirement health. But it’s possible to change financial behaviors with goal coaching and crystal-clear action steps on how to invest.
What Results to Expect First
Before digging in more to your company’s plan health, here’s some encouragement. Even if you’re already implementing a benefit to get your team better educated and motivated around financial wellness, overall retirement health is a lagging indicator. That means it could take several years of engagement with a behavior change program to begin seeing significant lift in your retirement plan. Before that happens, your workers will need to improve their habits around budgeting, debt elimination, and emergency savings. Solving those pain points will naturally result in big retirement plan improvements.
Remember that tool we mentioned above? It’s time to put it to good use!
Are you ready to see how well your employees are doing with their retirement planning? Click here to get a full assessment of your company’s retirement plan health. You’ll be able to download the free report in just a few minutes!