Is your retirement plan design sending the wrong message to workers?

Creating a retirement plan for all your employees is not easy. No two participants are the same or have the same needs or goals. That’s why it is important for employers to ensure they’re caring for all their employees up to and through retirement.

We are working with retirement plan sponsors and advisers to ensure that the overall program improves participants’ financial wellness and meets the lifecycle needs of all employees. That means working with them to consider design options that allow for maximum flexibility in how an employee uses the plan.

In many cases, it’s a matter of education and using both explicit and implicit communications. Explicit communications are obvious and incorporate all the letters, emails, and meetings as plan sponsors, advisors, and recordkeepers educate participants about their retirement plan.

But implicit communications are more nuanced. These are the messages built into a plan’s design, and there’s a very strong need for us to recognize what our plans are “telling our employees.”  For example, if a workplace retirement plan matches four percent, employees may assume that’s ”the right amount” to contribute. If enrollment into a retirement plan isn’t “mandated,” or “automatic” perhaps that sends a message that it’s not important to start saving for retirement. Employers need to spend time educating and communicating to their workforce in a more explicit way.

We had a client a few years ago who had this very problem. They contributed a large amount to their employees via a non-elective employer contribution. In essence they were saying “here’s money in exchange for doing nothing.” Unfortunately, with that approach, we found that many of their employees were not actively participating in the retirement plan with their own contributions.  Although it was very well-intended, that approach sent an implicit message to many of their employees that the company, in essence, was taking care of retirement savings every year and there wasn’t a need for employees to actively contribute more.

Simply redesigning their plan — with an eye on the implicit messages — generated huge returns for the employer and their employees, causing participant and deferral rates to spike significantly. We began by examining their competitive positioning, and then moved a large portion of the non-elective contribution to create a strong match of up to 10 percent. Combining that with auto-enrollment and auto-escalation features ensured employees would still receive the same generous amount in total without increasing any costs to the sponsor. These auto features drove positive behavior, but the match to 10 percent also drove better engagement, because it implicitly indicated to their employees that 10 percent or more was now the “the right amount” to save. 

A non-elective contribution may still be right for some organizations, and you need to understand your specific competitive position. But proactively managing the implicit messages of your plan’s design — and the explicit messages you send your workforce — can eliminate any misunderstandings and drive real retirement success for employees. It’s a delicate balance and one we are working on.

Finally, financial stress is increasing among American workers and the pandemic hasn’t helped. Most often, employees who are financially stressed can’t clearly think about long-term planning for retirement. Right now, many workers are more concerned with day-to-day living expenses and therefore, retirement savings may not be a priority. In this environment, employers have the opportunity to help workers with their immediate financial needs, but also help ensure they stay on-track for long-term financial success.

This starts with having a better understanding of the emotional drivers behind an employee’s plan for retirement. If retirements are being put on hold because employees are struggling now to pay monthly bills, then providing access to financial wellness solutions like emergency savings plans, student loan assistance programs, debt management, and other financial wellness tools can help them get control over their short-term financial needs. It can also give them the confidence to still focus on their long-term retirement goals.

By recognizing the holistic view of the employee’s finances and understanding that retirement is often just a part of the goal, a sponsor can truly help their employees with minimized stress and better financial outcomes.

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