The market crash of 2008 was a wake-up call for many 401(k) account-holders. At Aetna Inc., it raised awareness that some of its own employees might lack the financial preparation necessary for retirement.
“The crash put a magnifying glass on 401(k)s and account balances,” says Carol Klusek, head of retirement and financial benefits at the giant health insurance company.
Since the crash, Aetna has focused on a broad array of financial wellness initiatives with its employees—including getting a grasp on spending, debt and savings rates. “Once they have the underlying knowledge of how to manage their finances, then you can talk about the future. If people can’t pay the electric bill, they aren’t going to worry about saving for retirement, because they can’t.”
A growing number of employers are worried that their workers won't be prepared financially to retire when the time is right, and they’re taking steps to address the problem. For advisors who consult with workplace plans, it means broadening the focus from structuring retirement benefitsto helping their clients shape retirement outcomes.
A 401(k) benchmarking survey released last month shows that just 12 percent of employers believe that most of their employees will be financially prepared to retire, down from 15 percent in 2011.The survey is conducted annually by
Deloitte, the International Foundation of Employee Benefit Plans and the International Society of Certified Employee Benefit Specialists.
Employer worry is rising despite the stock market’s improvement, says Liz Davidson, CEO of Financial Finesse, which provides financial education programs to corporations, credit unions and municipalities. Davidson's company conducts a quarterly financial fitness surveyof employees at client companies, and it shows that a rising number of employees are getting their retirement act together: More are on track to meet retirement income replacement goals, and doing routine blocking and tackling, such as rebalancing their portfolios.
“It's just not improving fast enough,” Davidson says. “Employers are more worried about their workers' retirement readiness than we've ever seen them in 14 years as a business.”
Workers are just as worried. The 2013 Retirement Confidence Survey by the Employee Benefits Research Institute (EBRI) found that 36 percent of workers expect to stay on the job past age 65, up from 11 percent back in 1991. Meanwhile, the percentage of workers expecting to retire before age 65 is now half what it was two decades ago: down from 50 percent in 1991. Among current retirees, just 24 percent of current retirees are confident about their ability to meet basic expenses, down from 35 percent in 2011.
The New Retirement
The decline of traditional pensions is a key contributing factor to the lack of preparedness. Only a third of private-sector workers can lay claim to traditional defined benefit plans today, down from 88 percent in 1975, according to the National Institute on Retirement Security.
The 401(k) simply isn’t getting the job done for many workers. More than half of the workers surveyed by EBRI have saved less than $25,000 for retirement (excluding the value of their home and any traditional defined benefit pension). And just 24 percent of households with incomes of less than $35,000 have managed to save anything at all, down from 49 percent back in 2009.
“401(k)s weren't designed to be the primary retirement vehicle when they were introduced, but that's where we're landing,” says Scott Cole, a managing partner at Deloitte.
At the same time, people are working longer. The average retirement age is 61, up from 57 in the early 1990s, according to a recent Gallup poll.
That can be a healthy choice for many workers, since it paves the way for delayed Social Security filing, more years of retirement account contributions and fewer net years drawing down savings in retirement.
“It's a positive if the employee is really engaged with the work,” Davidson says. “There are plenty of older workers who are very healthy, love what they do and want to work until they die. The concern is with a segment of workers who would like to retire, but feel that they can't.”
In those cases, employers find themselves facing higher costs for compensation, health insurance and workers’ compensation, says Rick Unser of Los Angeles-based Lockton Financial Advisors, a firm that consults with mid-sized retirement plans ranging from 200 to 5,000 employees.
“When employees aren’t well-prepared, they’re spending three to five years longer in the workforce. What we’re trying to do is work with our clients to make sure they understand what it means.
Cole says the retirement readiness issue is also creating a talent acquisition problem for companies.
“What we're hearing is that if employees are financially prepared to retire, ideally the employer will be that much more successful attracting and retaining talent,” Cole says. “If my employees aren't prepared, they're that much more likely to move to another employer who will help them prepare better.”
The Pressure Is On
For advisors who work with workplace plans, the heat is on, Davidson says. “They're facing more pressure from employers to deal with participant outcomes, not just putting together fund lineups. The plan only is successful if the participants are able to retire.”
The Deloitte benchmarking survey also reflects accelerating employer action. The percentage of plan sponsors who say they have conducted a readiness survey in the past year jumped to 32 percent in 2012 from 18 percent in 2010.
Improved plan design will be part of the answer, Scott says. He recommends advisors work with sponsors to widen the use of auto-enrollment, and to increase default contribution rates.
He adds that it's imperative for plan advisors to help employers step up the level of communication and education on how to get the most out of defined benefit plans. For example, at 62 percent of companies offering an automated contribution step-up, less than 10 percent of participants are using the feature.
“Advisors also should be helping employers figure out how to utilize the demographic and plan balance data that they have to create targeted populations for customized communication,” Scott says. “The messages for a 60-year-old worker with a long tenure at the company who has a strong account balance probably needs to be focused on how to convert a 401(k) balance into an income stream. Someone the same age with a shorter tenure might not be as prepared financially to retire. There, the message might be about connecting that person to an advisor for assistance.”
Davidson thinks it's critical to have a holistic approach. “People used to think there was a magic bullet—online advice, target date funds or auto-enrollment could fix everything. Now, they're realizing that it's not one thing, but a combination of very good plan design, very low fees, very good education and advice.”
Mark Miller is a journalist and author who writes about trends in retirement and aging. He is a columnist forReutersand also contributes toMorningstarand the AARP Magazine. Mark is the author ofThe Hard Times Guide to Retirement Security(Wiley, 2010). He editsRetirementRevised.com. Twitter: @retirerevised