“There are numerous reasons why employees today are commonly working to older ages than in the past: people are living longer, they are healthier, and advances in technology have eliminated many barriers to continued employment,” states an Insights and Strategies publication from Sibson Consulting.
It continues, “However, organizations that understand their employees’ retirement situations are better equipped to predict and address problems that could alter the natural progression of the workforce. One such problem could be a potentially less-productive portion of the workforce made up of employees who would like to retire but who are not yet financially prepared to do so. Another problem could be skill gaps that occur if employees retire earlier than expected.”
Jonathan Price, Sibson Consulting vice president and consulting actuary in New York City, notes that if Baby Boomers are not ready to retire on time, it hurts the younger generations’ career progression. “Younger generations may not wait—they may leave or become unengaged,” he says. In addition, the Sibson publication says, employees unable to retire on time may consume a disproportionate share of the organization’s resources in the form of higher salaries and benefits.
According to Price, when plan sponsors look at retirement readiness, the conventional wisdom is just to confirm they are ready to retire on time, but they need to also consider if employees are ready to retire earlier than the employer expects. “If employers are unaware of employees’ early retirement, it can create gaps in knowledge and disruption to business units or divisions and to talent transitions. The costs of rectifying after the fact are high,” he says.
A Willis Towers Watson survey found that among employers that offer both a defined contribution (DC) and a defined benefit (DB) plan, 39% view their employees’ retirement readiness as a current business risk, and 44% project that it will be a risk within two years.
Measuring retirement readiness
Price says there is a spectrum of measuring retirement readiness, from anecdotal to calculations. However, waiting until a plan sponsor sees that employees are not retiring on time is too late to manage the pipeline of talent, so plan sponsors need to incrementally address this as employees approach retirement.
Retirement plan providers offer many tools or calculators to measure employee retirement readiness. According to Price, some measure income replacement ratios, while some measure a wealth accumulation factor—which is a participant’s account balance divided by pay.
The Congressional Budget Office (CBO) noted in a report that although a common rule of thumb is that replacing at least 70% of gross preretirement income would avoid a marked decline in retirees’ standard of living, that specific goal is not appropriate for all people. To better capture the diversity of people’s circumstances, researchers have developed a range of target rates that vary with individual characteristics, such as marital status, lifetime income, and homeownership. In addition, without the ability to adjust factors used in replacement rate planning tools, workers may over- or under-estimate how much they need to save for retirement, the Government Accountability Office (GAO) concluded in a report.
According to Price, one can find advantages and pitfalls of each type of numerical factor. Sibson has a grading system that reflects expected retirement readiness, which could be a replacement ratio, but also factors in uncertainty—what is the probability of getting there? “For example, for a 45-year-old, there is some probability of having an 80% replacement ratio at age 65, but what is the variability of possible outcomes? An employee may have a range of 75% to 85%, but also a range of 40% to 90%. Employers need to know that,” he says. “They need to know: What is the expected replacement ratio; what is the likelihood of attaining that; and what is the variability of outcomes.”
Some providers and industry representatives are creating retirement readiness measures that factor in the likelihood of attaining retirement readiness—looking at changes participants may make in their working lives and savings habits.
Christine (Chris) Lange, SVP, digital solutions, retirement at Voya Financial, based in Windsor, Connecticut, says translating retirement plan participant balances plus future contributions and outside assets into how much monthly income they are going to have to sustain them for life so they can retire has been very successful. “We’ve found that when participants see this they are inclined to take action because they realize they are not only increasing their balances but purchasing future income so they can retire,” she says.
Voya rolled that up for plan sponsors so they can see through data visualization where their employees stand in terms of their ability to retire. “Sponsors can see who is on track and who is not. It allows them to do targeted messages and work with certain employees,” she notes.
Although Voya’s tool defaults to a specific retirement income replacement rate, the participant and the plan sponsor can change it. “Everything the participant does is shown in the context of how it affects retirement income—the impact of participating, taking a loan, etc.,” she says.
Helping participants get to retirement readiness
Tom Armstrong, VP, customer analytics and insights at Voya Financial, based in Braintree, Massachusetts, says not only do plan sponsors want to know employees’ retirement readiness, it is helpful for them to understand how participants get there—what are the key things influencing how participants are getting there?
Lange adds that replacement income may be a primary measure of retirement readiness, but financial wellness and employee engagement are important, especially in helping employees make decisions.
Armstrong says the Voya Behavioral Finance Institute for Innovation has done a decision style analysis of participants and found that those who are more reflective have better outcomes. “We packaged those findings to provide plan sponsors information about how plan participants are making decisions—their decision styles and how plan design changes can improve their ability to retire. “Our research solidifies that when we get participants to make decisions in a digital way, it can determine if they are reflective in their decisions,” he says.
For example, according to Armstrong, if a participant is moving a slider in the retirement readiness tool to increase or decrease their savings rate, they are immediately using reflective thinking to see how saving more would help. Many are using this to move their retirement date earlier. Voya provides to plan sponsors how participants are engaging in these tools to improve outcomes.
Lange says this all ties into workforce management. If an employee plans to retire earlier and the employer wants to retain them, that is something the employer should address. If employees are retiring too late, it makes employers more keen on making sure employees are ready to retire and can make a choice when to retire.Price points out it is important for plan sponsors to realize this is not something they wait until an employee is retirement age to consider. “Employees need to know how to manage retirement readiness themselves. Employers need to be able to communicate to Millennials and Generation X what actions they need to take now to improve their retirement readiness,” he says.