Money Management: The Key To Saving For Retirement

High earners and high net worth families tend to use personal financial advisors to help manage their money and plan for their future. Middle- and  lower-wage earners tend to use a combination of print, broadcast and online media resources, and…their employer. Of all those resources, some workers may feel an employer is their most reliable resource for learning about managing money and acquiring the resources to do so.

When assessing your program from that weighty perspective, how does your organization measure in terms of being a – if not the most – critical resource to help your workforce become financially responsible and adequately save for retirement?

The pandemic, inflation, the real estate bubble – all of these economic issues have converged in recent years to put unprecedented financial pressure on working Americans. Even higher-wage earners have struggled with problems ranging from paying off student loan debt, to rising rents and home-buying prices, to working longer hours without corresponding compensation.

To stay competitive in today’s fierce labor market, employers should consider beefing up their financial wellness programs. After all, from the worker point of view, a job is the funding mechanism to establish one’s lifestyle. A company can offer perks like car wash facilities, nap rooms and even “pawternity” leave, but at the end of the day people care more about their paycheck and how far it will go.

Today’s employer-sponsored financial wellness programs should focus on optimizing those paychecks. The following are some recent trends in this area.

Emergency Savings Account

Employers can offer FDIC-insured bank accounts to help workers build an emergency savings fund. Workers can opt for automatic deductions transferred from their paychecks, and employers may even contribute or offer to match up to a certain limit. This optional savings fund is designed to cover essential expenses for six to nine months should a worker find himself out of work. It can also provide cash for emergency situations. However, its key function is to prevent workers from plunging into debt or plundering their retirement or investment accounts – which benefit the most from long-term growth.

An emergency fund may be offered as Rainy Day Savings Account within their 401(k) plan, by allocating an after-tax contribution to a separate account in coordination with the 401(k) pre-tax contribution account. Other options include a “sidecar” Roth IRA, prepaid debit card, or credit union account for this savings vehicle

Debt Assistance

Student loan forgiveness has been a controversial political issue because of the millions of people who do not benefit – either because they forewent college due to the expense, or they had to pay off their loans on their own. However, employers that offer education assistance also offer workers the increased potential for higher earnings and savings now and in the future. At the same time, an employer may wish to provide some parity by offering other types of debt assistance, such as debt and credit counselors, bankruptcy filing assistance, and even a short-term savings account for a specific goal, such as saving for a car or the down payment for a home. Some of these benefits may already be offered through your Employee Assistance Program (EAP). If so, promote them separately as a debt assistance benefit.

Money Management Tools

There are many smartphone apps designed to help consumers learn the basics of budgeting, debt and money management, and how to develop a long-term investment strategy. In fact, there are so many it can be intimidating, and some may not be legitimate or as secure as others. By vetting and promoting specific web and mobile apps, employers can make it easier and less intimidating for workers. Plus, with colleagues all using the same tools, they can discuss and help each other learn to use them. Consider financial calculators, investment profile questionnaires, asset allocation recommendations, informative videos and articles, personalized guidance, and monitoring functions.

Auto Enrollment & Auto Escalation

The first feature automatically enrolls workers into the company retirement plan, forcing them to actively opt out if they choose not to participate. The second feature automatically increases the retirement plan participant’s contribution annually, based on a pre-determined percentage up to a certain limit. It also requires workers to opt out of participation. Be aware that Congress is currently considering legislation that would mandate automatic enrollment and escalation.

Auto Portability

Instead of cashing out of their retirement account when they change jobs, workers who switch  employers would benefit more from a direct rollover. Employers can add a portability feature to their plans that automatically transfers account balances of less than $5,000 to an active account in the workers’ subsequent employer plan. This feature also benefits employers by eliminating the task of cashing out terminated participant accounts with less than $1,000.

Guaranteed Income Option

The SECURE Act of 2019 made it easier for plan sponsors to offer an annuity as an investment option within a retirement plan. This option would yield a certain level of income for life once they retire. Workers who contribute to an in-plan annuity over many years can produce higher returns and reduce interest rate risk when compared to purchasing an annuity contract later in life. Moreover, employer-sponsored in-plan annuities typically feature lower fees.

 Hybrid Retirement Plan

Employers may have reduced overhead expenses by switching from defined benefit (DB) to defined contribution (DC) plans, but the impact on workers has been relatively negative. Self-directed 401(k) plans are not proving to be as reliable at providing income throughout a long retirement. Therefore, employers may want to consider reintroducing some elements of a pension account via a hybrid retirement plan. A horizontal hybrid plan can offer both DB and DC accounts for the same salary amounts in parallel, as well as portability for workers who change jobs. For employers, the defined benefit guarantee is lower than that of a traditional pension plan, and worker assets are pooled to share the risk of providing lifetime benefits.

Financial Literacy Education

Invite experts from your retirement plan or local financial advisors to host onsite (or web-based) financial wellness seminars, such as setting long- and short-term financial goals, the securities risk/reward spectrum, how to choose 401(k) investments, and what to do when they’re getting ready to retire.

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