It Takes a Village to Achieve Retirement Readiness

By Daniel Tatomir, AIF? , Vice President & Manager of Retirement Plan Advisors at Fragasso Financial Advisors

A recent study by Vanguard on American workers’ readiness for retirement highlights the importance of access to a well-designed employer sponsored plan to help prepare for a secure retirement. Governments at the state and federal levels continue to consider and pass legislation encouraging companies to adopt retirement plans and include plan provisions designed to help workers save – and they have had a positive impact – but there is still work to be done. Approximately only half of private sector employees participate in a retirement plan, so over 30 states have considered legislation requiring employers to offer a plan with many of them already signing programs into law.

The Vanguard study also underscores the need for workers to increase the savings they have earmarked for retirement. Workers often hear they should target 70% – 85% of their pre-retirement income in retirement to maintain a similar standard of living. But the study found that the spending needs of retirees vary greatly by income level. Earners in the 25th percentile of income with earnings of approximately $22,000 spend 96% of their pre-retirement income. By contrast, higher earners making $173,000 at the 95th percentile spend only 43% of their pre-retirement income. This disparity highlights the need for lower- and middle-income workers to have savings to supplement social security to meet their spending needs.

So, what can companies do to help their employees build the savings needed to retire comfortably? Offering a retirement plan is a great first step. Secure Act 2.0, passed at the end 2022, increased available tax credits that can help offset some of the costs of the plan and it created a new tax credit to offset a portion of an employer contribution, making it easier to start a new plan.

Plan Design - Thought should also be put into the design of the plan and the provisions that are included as they go a long way in determining how employees use the plan. Auto enrollment and escalation features have been proven to increase use of the plan and the level of employee savings. These are required features of new plans, but existing plans could consider adding these effective features. Periodic re-enrollment campaigns can target nonparticipating employees as well as those that aren’t saving to a level to receive the maximum employer match are additional ways to encourage plan usage.

Employee Education - Education meetings should be offered to help employees understand the benefits of the plan, the best practices of plan usage, and the common mistakes to avoid to better position themselves to meet their goals. The education plan should be tailored to the needs of plan participants and how they are using the plan.

Individual Financial Counseling - Individual meetings available for employees allow time to discuss their unique situation and goals. Often employees have financial planning need and questions about topics outside of the retirement plan. Individual meetings provide an opportunity to have these concerns addressed.

Keeping these strategies in mind when starting a new plan or reviewing a current plan can help give employees a better chance of meeting the spending goals they need in retirement. A well-designed plan is an important employee benefit that can help attract and retain talented employees. If you would like to review your plan or options feel free to reach out to us.

https://corporate.vanguard.com/content/dam/corp/research/pdf/the_vanguard_retirement_outlook.pdf

Investment advice offered by investment advisor representatives through Fragasso Financial Advisors, a registered investment advisor.