Employers Must Act Ahead of Retirement Wave

According to Willis Towers Watson, just over 80% of organizations acknowledge the importance of their older workers and managing the retirement process; however, only about half believe they understand the process well, and just one-quarter feel they have found an effective approach.

Willis Towers Watson published a white paper, “Working late: Managing the wave of U.S. retirement,” exploring employer’s lack of confidence when it comes to tracking their employees’ plans for when and how to retire.

“Older workers can be some of employers’ most important employees—valued for their knowledge of industries, companies, and customers, and their contributions to organizations’ continuity and future success,” the white paper says. “However, demographics of the U.S. working population illustrate that the pace of their departure is increasing, as 83% of employers report a significant number of employees at or approaching traditional retirement age.”

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According to Willis Towers Watson, just over 80% of organizations acknowledge the importance of their older workers and managing the retirement process. Yet only about half believe they understand the process well, and just one-quarter feel they have found an effective approach.

“There are also important disparities in perception—between managements’ views of when pending retirements will occur, and the plans of the workers,” the white paper says. “Employers are concerned both about increasing retirements and the resulting loss of seasoned employees’ skill and experience, as well as rising numbers of delayed departures leading to higher salary and benefit costs.”

Accordingly, Willis Towers Watson finds firms are taking a new look at retirement patterns, developing new strategies for balancing the supply and demand of older workers’ talent, and integrating their workplace programs for physical, social, and financial well-being.

When asked why managing the orderly retirement of employees is important, 83% of those surveyed ranked “orderly transfer of knowledge of the organization” as their top concern, while 60% pointed to “concerns over workforce productivity.” About one-third pointed to “roadblocks in promoting younger employees.” Interestingly, the costs of keeping on older workers was relatively less important—a top three concern for just 20% or so of those surveyed.

“These workforce concerns are nearly universal, ranking high at firms with both younger and older work forces, and irrespective of the structure of their benefit programs,” the white paper says. “Complicating management’s task of developing strategies for orderly retirements is a sizable misunderstanding of employees’ motivations and circumstances, in particular their perceived retirement resources and freedom to stop working.”

Among employees, 69% say they hope employers will make working past conventional retirement age easier. Most older employees, about two-thirds, would prefer to remain at their current employers, even if a comparable job was available elsewhere.

“Still, 55% of employees over 50 expressed a desire to retire as soon as they can afford to,” the white paper says. “For many, however, reaching that goal could be delayed. More than half of older employees report financial worries, and a significant minority—about a third—feels stuck in their jobs. Accordingly, many older employees expect to defer retirement until after age 70.”

From the employer perspective, most organizations appear to underestimate the financial challenges facing older workers, and thus the likely timing of retirements, Willis Towers Watson says.

“Seventy-one percent of employers believe that most of their older employees are likely to have adequate funds to retire when they choose, and 77% expect that most of their older employees are not likely to need to work into their 70s for financial reasons,” the white paper says. “Many employers also seem to misunderstand employees’ motivations for working longer. While over half of employees would prefer a fast track to retirement, only one in five employers believes that their people are eager to leave, and would retire at the point they qualify for benefits.”

According to the white paper, employers in many cases plan to make it easier for older employees to work longer and support knowledge transfer in the next few years.

“At about one-third of employers, older workers can downshift their roles from management positions to working as individual contributors,” the white paper says. “Such programs may be expanded to half of organizations by 2020. Other measures include shorter work weeks, or scaling back to part-time or part-year employment at many organizations. Roughly half of companies currently engage former employees who are drawing retirement benefits as consultants or contingent workers. About as many hire people who have retired from other firms with relevant industry experience.”

Education and Better Investments Needed to Propel HSAs to Retirement Savings Vehicles

The frequency of withdrawals prevents HSA account holders from building a meaningful balance to use for health care expenses in retirement, and individuals are unlikely to allocate their assets to investment products if their primary goal is to fund short-term medical expenses, Cerulli says.

Industry constituents who are bullish on the growth potential of the health savings account (HSA) market often describe it as “the 401(k) market from 30 years ago,” according to The Cerulli Edge—U.S. Retirement Edition, 4Q 2018 issue.

Cerulli Associates says it views this comparison as mostly valid. It points out that like 401(k) plans in the 1980s and 1990s, which were ancillary to defined benefit (DB) plans, HSAs today are supplementary savings accounts. In addition, prior to the Pension Protection Act of 2006 (PPA) and the advent of target-date funds (TDFs) during the past decade, 401(k) plans were invested more conservatively with greater allocations to cash and short-term securities (e.g., money market funds). Similarly, HSA investments today are predominantly oriented toward capital preservation rather than growth.

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Some studies also depict a comparable year-over-year growth trend between HSAs and 401(k) plans in the 10 years following inception for each market, respectively.

However, unlike 401(k)s, the frequency of withdrawals prevents HSA account holders from building a meaningful balance to use for health care expenses in retirement, and individuals are unlikely to allocate their assets to investment products (e.g., equity mutual funds) if their primary goal is to fund short-term medical expenses, Cerulli says. Education is one thing that can help refocus the view of HSAs as retirement savings accounts rather than short-term spending accounts, Cerulli recommends.

“Many DC plan participants miss the opportunity to accumulate savings for health care needs in retirement, not because they do not want to invest, but because they do not know that they can use an HSA to invest,” says Dan Cook, an analyst in the retirement practice at Cerulli. “This knowledge gap can be addressed through education efforts aimed at getting participants, plan sponsors, and advisers to view HSAs as a retirement benefit.”

A useful starting point is to clearly explain the triple tax advantage associated with HSAs—contributions reduce taxable income; earnings on the accounts build up tax-free; and distributions from the accounts, for qualified expenses, are not subject to taxation. Cerulli also finds it helpful for providers to quantify the impact of health care costs in retirement.

Another important consideration is the timing and frequency of HSA-related communications. “Cerulli advocates for consistent HSA communications (i.e., conducted year-round) that are linked with the employer’s retirement plan offering (e.g., defined contribution plan),” says Cook. “By fostering a strong connection between HSA and DC [defined contribution] plans, providers can help participants associate the HSA with retirement savings.”

Cerulli finds that more than three-quarters (76%) of DC plan recordkeepers do not offer HSA administration services; most employers that offer both an HSA and a DC plan will use different vendors for each account. However, this dynamic may be shifting, as 31% of DC plan recordkeepers that do not currently administer HSAs indicate they are considering entering this market in the near future.

Recordkeepers with a presence in both HSA and DC plan markets have several advantages, including the ability to aggregate participant data and craft a consistent communication approach, and the potential to offer bundled pricing for plan sponsors.

According to the Cerulli report, HSA investment menu modernization would also be helpful in repositioning HSAs as retirement savings vehicles. One asset manager suggests that providers can make lower-cost share classes (e.g., R-6 shares, I-shares) available for HSAs to help decrease costs for account holders. Research from Morningstar found that the quality of investment options has improved across health savings accounts (HSAs), but high fees and low transparency remain hurdles.

Information about how to purchase the Cerulli report is here.

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